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How do the financial and oil sanctions affect the Iran's economy: a DSGE framework

Seyyed Reza Nakhli (University of Isfahan, Isfahan, Iran)
Monireh Rafat (Department of Economic, University of Isfahan, Isfahan, Iran)
Rasul Bakhshi Dastjerdi (Department of Economic, University of Isfahan, Isfahan, Iran)
Meysam Rafei (Department of Economic, Kharazmi University, Tehran, Iran)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 30 July 2020

Issue publication date: 27 April 2021

308

Abstract

Purpose

The purpose of the current paper is to analyze the simultaneous effects of oil sanctions and financial sanctions on Iran's macroeconomic variables in a small open economy in the dynamic stochastic general equilibrium (DSGE) framework.

Design/methodology/approach

A DSGE model with the new Keynesian approach has been designed for the above mentioned purpose giving consideration to households, production, trade, oil, government and central bank sectors. All of the parameters were calibrated by using geometric means of macroeconomic variables in 2004–2017 as the steady-state values of the variables in the static model.

Findings

Amplifying the intensity of the oil sanctions reduces oil production due to decreasing investment, technology and export of oil and reduces the central bank's foreign reserves ratio to the money base that leads to an increasing exchange rate. Furthermore, oil sanctions decrease the government revenues due to a decrease in oil export and by the government imposing an expansionary fiscal policy in the form of increasing current expenditure and preserving construction expenditure to prevent deepening the recession, which causes budget deficit and then the issue of more bonds with a higher nominal interest rate. On the other hand, financial sanctions raise transaction costs and marginal costs in the trade sectors that lead to inflation and a decrease in nonoil export and various kinds of imports. Due to inflation and uncertainty, consumption of a household increases and investment expenditure of a household decreases.

Originality/value

To the best of the author's knowledge, few studies in the world have analyzed the economic effect of the sanctions in the framework of DSGE models. There is no study in Iran to date which investigates the effects of the sanctions in the form of a DSGE model. So, this paper is the first study in Iran and one of the few studies in the world using a DSGE model for analyzing the effects of sanctions. Imposing three kinds of oil sanctions in addition to a financial sanction is another innovation of the current paper.

Keywords

Citation

Nakhli, S.R., Rafat, M., Bakhshi Dastjerdi, R. and Rafei, M. (2021), "How do the financial and oil sanctions affect the Iran's economy: a DSGE framework", Journal of Economic Studies, Vol. 48 No. 4, pp. 761-785. https://doi.org/10.1108/JES-01-2020-0031

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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