Volume 27, Issue 2 (Summer 2022)                   JPBUD 2022, 27(2): 3-50 | Back to browse issues page


XML Persian Abstract Print


Download citation:
BibTeX | RIS | EndNote | Medlars | ProCite | Reference Manager | RefWorks
Send citation to:

Seighalani S, Jalali-Naini S A, Khiabani N. (2022). External Shocks, Exchange Rate Changes, and Intermediate Goods: Explanation of Stagflation in Iranian Economy. JPBUD. 27(2), 3-50. doi:10.52547/jpbud.27.2.3
URL: http://jpbud.ir/article-1-2133-en.html
1- Institute for Management and Planning Studies, Tehran, Iran, , shahbod.seighalani@gmail.com
2- Department of Economics, Institute for Management and Planning Studies, Tehran, Iran.
3- Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran
Abstract:   (1659 Views)
Explanation of economic cycles, especially stagflation in an oil-dependent economy with high dependency on imported intermediate goods, requires a prototypical representation of the supply side and the propagation mechanism of the external shocks. In commodity-exporting countries, exchange rate changes are often caused by exogenous changes in the terms of trade. Apart from this, external shocks such as international sanctions, restricting foreign trade and increasing transaction costs, not only affect external relative prices but also disrupt the supply chain, thus can be a very strong source of economic cycles or stagflation episodes. External shocks modify investment decisions regarding domestic and foreign assets, significantly affect household consumption and hence the demand side of the economy. Where the final product is highly dependent on imported intermediate goods, negative foreign shocks (i.e. sanctions) can disrupt the supply chain, via the imported intermediate goods channel, and affect output supply price. Therefore, the transmission mechanism of the external shocks in an economy with the above features requires appropriate modeling of both the demand and supply sides. As to explain the observed episodes of stagflation in the Iran’s economy, we expand the supply side of a typical new Keynesian DSGE model by presenting and separating imported and domestic intermediate goods in the production function as components of the supply chain, introducing an extra channel for the impact of external shocks on output, inflation, and consumption.
Full-Text [PDF 4215 kb]   (559 Downloads)    
Type of Study: Research | Subject: Macroeconomics
Received: Jul 24 2022 | Accepted: Sep 21 2022 | ePublished: Dec 17 2022

References
1. Baharvand, N., Farzam, V., & Nademi, Y. (2018). Effect of Oil Shocks on Business Cycle in the Iran's Economic Using the Markov-Switching Model (1988: 2-2014: 4). The Journal of Economic Studies and Policies, 5(1), 3-22.
2. Balke, N. S., & Brown, S. P. (2018). Oil Supply Shocks and the US Economy: An Estimated DSGE Model. Energy Policy, 116(1), 357-372. [DOI:10.1016/j.enpol.2018.02.027]
3. Bastanifar, I., & Mirzaee, R. (2014). An Analysis of the Determinants of Stagflation in Iran and Policy Recommendations. Journal of Monetary and Banking Research, 7(21), 361-380. [https://jmbr.mbri.ac.ir/article-1-138-fa.html]
4. Bergholt, D., Larsen, V. H., & Seneca, M. (2019). Business Cycles in an Oil Economy. Journal of International Money and Finance, 96(1), 283-303. [DOI:10.1016/j.jimonfin.2017.07.005]
5. Brooks, S. P., & Gelman, A. (1998). General Methods for Monitoring Convergence of Iterative Simulations. Journal of Computational and Graphical Statistics, 7(4), 434-455. [DOI:10.1080/10618600.1998.10474787]
6. Bullard, J., & Mitra, K. (2002). Learning about Monetary Policy Rules. Journal of Monetary Economics, 49(6), 1105-1129. [DOI:10.1016/S0304-3932(02)00144-7]
7. Christiano, L. J., Trabandt, M., & Walentin, K. (2011). Introducing Financial Frictions and Unemployment into a Small Open Economy Model. Journal of Economic Dynamics and Control, 35(12), 1999-2041. [DOI:10.1016/j.jedc.2011.09.005]
8. Di Pace, F., Juvenal, L., & Petrella, I. (2020). Terms-of-Trade Shocks Are Not All Alike. IMF Working Paper, WP/20/280. [DOI:10.5089/9781513563916.001]
9. Dornbusch, R. (1976). Expectations and Exchange Rate Dynamics. Journal of Political Economy, 84(6), 1161-1176. [DOI:10.1086/260506]
10. Ekholm, K., Moxnes, A., & Ulltveit-Moe, K. H. (2012). Manufacturing Restructuring and the Role of Real Exchange Rate Shocks. Journal of International Economics, 86(1), 101-117. [DOI:10.1016/j.jinteco.2011.08.008]
11. Forbes, K., Hjortsoe, I., & Nenova, T. (2018). The Shocks Matter: Improving Our Estimates of Exchange Rate Pass-Through. Journal of International Economics, 114(1), 255-275. [DOI:10.1016/j.jinteco.2018.07.005]
12. Frenkel, J. A., & Rodriguez, C. A. (1982). Exchange Rate Dynamics and the Overshooting Hypothesis. Staff Papers, 29(1), 1-30. [DOI:10.2307/3866942]
13. Frisch, R. (1933). Propagation Problems and Impulse Problems in Dynamic Economics. Essays in Honor of Gustav Cassel.
14. Gali, J., & Monacelli, T. (2005). Monetary Policy and Exchange Rate Volatility in a Small Open Economy. The Review of Economic Studies, 72(3), 707-734. [DOI:10.1111/j.1467-937X.2005.00349.x]
15. Galí, J., & Monacelli, T. (2016). Understanding the Gains from Wage Flexibility: The Exchange Rate Connection. American Economic Review, 106(12), 3829-3868. [DOI:10.1257/aer.20131658]
16. Garcimartin, C., Kvedaras, V., & Rivas, L. (2016). Business Cycles in a Balance-of-Payments Constrained Growth Framework. Economic Modelling, 57(1), 120-132. [DOI:10.1016/j.econmod.2016.04.013]
17. Grubb, D., Jackman, R., & Layard, R. (1982). Causes of the Current Stagflation. The Review of Economic Studies, 49(5), 707-730. [DOI:10.2307/2297186]
18. Jalali-Naini, A. R., & Naderian, M. A. (2020). Financial Vulnerability, Fiscal Procyclicality and Inflation Targeting in Developing Commodity Exporting Economies. The Quarterly Review of Economics and Finance, 77(1), 84-97. [DOI:10.1016/j.qref.2020.01.001]
19. Justiniano, A., & Preston, B. (2010). Monetary Policy and Uncertainty in an Empirical Small Open‐Economy Model. Journal of Applied Econometrics, 25(1), 93-128. [DOI:10.1002/jae.1153]
20. Karadimitropoulou, A. (2018). Advanced Economies and Emerging Markets: Dissecting the Drivers of Business Cycle Synchronization. Journal of Economic Dynamics and Control, 93(1), 115-130. [DOI:10.1016/j.jedc.2018.01.029]
21. Khan, S., & Knotek II, E. S. (2015). Drifting Inflation Targets and Monetary Stagflation. Journal of Economic Dynamics and Control, 52(1), 39-54. [DOI:10.1016/j.jedc.2014.11.007]
22. Kose, M. A., & Riezman, R. (2001). Trade Shocks and Macroeconomic Fluctuations in Africa. Journal of Development Economics, 65(1), 55-80. [DOI:10.1016/S0304-3878(01)00127-4]
23. Laudati, D., & Pesaran, M. H. (2021). Identifying the Effects of Sanctions on the Iranian Economy using Newspaper Coverage. CESifo Working Paper No. 9217. [DOI:10.2139/ssrn.3898315]
24. Massot, J. M., & Merga, R. D. (2022). A Balance-of-Payments-Constrained Growth Model for a Small Commodity Exporting Country: Argentina between 1971 and 2016. International Review of Applied Economics, 36(4), 564-588. [DOI:10.1080/02692171.2021.2006152]
25. Matsen, E., & Torvik, R. (2005). Optimal Dutch Disease. Journal of Development Economics, 78(2), 494-515. [DOI:10.1016/j.jdeveco.2004.09.003]
26. McCallum, B. T., & Nelson, E. (1997). An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis: National Bureau of Economic Research Cambridge, Mass., USA. [DOI:10.3386/w5875]
27. Mehrara, M., & Oskoui, K. N. (2007). The Sources of Macroeconomic Fluctuations in Oil Exporting Countries: A Comparative Study. Economic Modelling, 24(3), 365-379. [DOI:10.1016/j.econmod.2006.08.005]
28. Milani, F. (2011). Expectation Shocks and Learning as Drivers of the Business Cycle. The Economic Journal, 121(552), 379-401. [DOI:10.1111/j.1468-0297.2011.02422.x]
29. Monacelli, T. (2005). Monetary Policy in a Low Pass-Through Environment. Journal of Money, Credit and Banking, 37(6), 1047-1066. [DOI:10.1353/mcb.2006.0007]
30. Nakhli, S. R., Rafat, M., Bakhshi Dastjerdi, R., & Rafei, M. (2020). A DSGE Analysis of the Effects of Economic Sanctions: Evidence from the Central Bank of Iran. Iranian Journal of Economic Studies, 9(1), 35-70.
31. Nolan, C., & Thoenissen, C. (2009). Financial Shocks and the US Business Cycle. Journal of Monetary Economics, 56(4), 596-604. [DOI:10.1016/j.jmoneco.2009.03.007]
32. Olson, M. (1982). Stagflation and the Political Economy of the Decline in Productivity. The American Economic Review, 72(2), 143-148.
33. Rahmati, M. H., Madanizadeh, S. A., Jabari, M., & karimirad, A. (2015). Business Cycle Accounting: The Case of Stagflation in Iran. Planning and Budgeting, 20(3), 41-65. [http://jpbud.ir/article-1-1155-fa.html]
34. Senbeta, S. (2011). A Small Open Economy New Keynesian Model for a Foreign Exchange Constrained Economy. MPRA Paper No. 29996. [DOI:10.2139/ssrn.1812743]
35. Senbeta, S. R. (2013). Foreign Exchange Constraints and Macroeconomic Dynamics in a Small Open Economy. Working Papers, No. 2013023, University of Antwerp, Faculty of Business and Economics.
36. Spinola, D. (2020). Uneven Development and the Balance of Payments Constrained Model: Terms of Trade, Economic Cycles, and Productivity Catching-Up. Structural Change and Economic Dynamics, 54(1), 220-232. [DOI:10.1016/j.strueco.2020.05.007]
37. Thirlwall, A. P. (2011). The Balance of Payments Constraint as an Explanation of International Growth Rate Differences. PSL Quarterly Review, 64(259), 429-438.
38. Walsh, C. E. (2017). Monetary Theory and Policy: MIT Press.
39. Williamson, O. E. (2008). Outsourcing: Transaction Cost Economics and Supply Chain Management. Journal of Supply Chain Management, 44(2), 5-16. [DOI:10.1111/j.1745-493X.2008.00051.x]
40. Yousefi, M., & Khadam, B. (2017). Determinants of Stagflation in Iranian Manufacturing Sector. Economics Research, 17(66), 227-256.

Rights and permissions
Creative Commons License This work is licensed under a Creative Commons Attribution 4.0 International License.

© 2024 CC BY-NC 4.0 | Planning and Budgeting

Designed & Developed by : Yektaweb