The Impact of Monetary and Fiscal Policy Shocks on Financial Stability and Household Behavior in Iran: A DSGE Approach

Articles in Press

Document Type : Original Article

Authors

Omid Ali Adeli ¹

Masoumeh vali ²

¹ Associate Professor, Department of Islamic Economics, Faculty of Economics and Administrative Sciences, University of Qom, Qom, Iran

² Affiliated Faculty Member, Department of Accounting, Faculty of Business, Islamic Azad University, Karaj Branch, Karaj, Iran

https://doi.org/10.22067/mfe.2025.92995.1534

Abstract

This study investigates the impact of fiscal policy shocks on financial stability and household behavior within the framework of a small open economy. Given the structural fragility of Iran's economy in the face of fiscal volatility, the primary aim is to analyze the dynamic direct and indirect effects of increased taxation on output, consumption, exchange rates, inflation, and the budget deficit. For this purpose, a calibrated Dynamic Stochastic General Equilibrium (DSGE) model tailored to the Iranian economy is employed. Oil revenues and sanctions are incorporated into the model as exogenous shocks. The model, comprising 41 parameters, was simulated over 100 periods, and both impulse responses and impulse response functions were generated. The results indicate that monetary shocks lead to an increase in the interest rate and a decrease in inflation, whereas tax shocks increase consumption and reduce labor supply. Oil and sanction shocks have limited effects on consumption but exacerbate financial instability. A diagnostic test reveals negligible estimation error; however, issues related to data scaling are notable. It is recommended that empirical validation be conducted using Iranian data, alongside more precise modeling of exchange rate dynamics, to strengthen policy recommendations.

Keywords

DSGE model

fiscal policy

financial stability

small open economy

household behavior

Subjects

• Financial monetary economy

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