Planning and Budgeting

In the literature on business cycles, despite the fact that income volatility in emerging countries is lower than developed, consumption volatility is higher, which is known as the puzzle of excess consumption volatility over production. The difference in the source of shocks in developed and emerging countries and the difference in the mechanism of shock transmission in the economies of emerging countries compared to developed countries are known as two causes of the aforementioned puzzle. The purpose of this study is to explain the volatility of production, consumption and investment variables and the deficit of consumption volatility to production with respect to two structural features of the Iranian economy, including the dominance of external shocks or more specifically, income shocks in the oil sector (Mehrara and Oskoui, 2006) and the restriction of household access to the financial market by adding financial erosion from the separation of households into Ricardian and non-Ricardian within the framework of a stochastic dynamic general equilibrium model approximated by the structural features of the Iranian economy. Since households avoid rapid and significant changes in consumption, the utility function of the model is designed with consumption habits in mind. Also, adding the risk premium of the uncovered interest rate parity puzzle in the model shows that when the real exchange rate increases, the value of households' foreign currency debts increases and their financial vulnerability increases, and provides a better explanation for the puzzle posed in the Iranian economy. The results of the theoretical general equilibrium model of the model variables including σ_Y, σ_c, and σ_C⁄σ_Y represent 15.96, 5.07, and 0.25, respectively, which, compared to the values ​​extracted from the empirical part, which are 12.4, 5.78, and 0.46, respectively, represent the puzzle of the deficit of consumption volatility relative to production in Iran.

Keywords: General equilibrium model, consumption fluctuations, production fluctuations, exchange rate, financial friction