The Macroeconomic Effects of Energy Price Shocks: Introducing a Dynamic Stochastic General Equilibrium Model

Esmail Abounoori

Professor, Faculty of Economics and Management, Semnan University, esmaiel.abounoori@gmail.com

Asghar Shahmoradi

Assistant Professor, Faculty of Economics, University of Tehran, shahmoradi@ut.ac.ir 

 Vahid Taghinejad

Assistant Professor, Faculty of Economics, Mazandaran University, omran@umz.ac.ir

 Mohammad Hadi Rajaii[1]*

Assistant Professor, Shemal University, hadi.rajaii@gmail.com

Received: 2012/05/05  Accepted: 2012/09/22

Abstract

The main goal in this paper is introducing a DSGE model to evaluate the effects of an energy price shock on macroeconomic variables in Iran. The results indicate deviation in production, labor supply, and inflation from their steady state due to an energy price shock. The most important deviation from optimal levels relates to an 11% deviance in relation to long term investment growth rates. The results further indicate that the lower the share of energy and the higher the share of labor in the production function, the more quickly investment returns to its steady state rate and the less GDP will deviate from optimal levels. In addition, the more energy revenues are neutralized in the national budget, the less production and government expenditure will deviate from their steady state.

JEL Classification: C61, E20, E42, Q40

Key Words: Dynamic Stochastic General Equilibrium (DSGE) Model, Energy Price Shock, Macroeconomic variables, Neutralization of Energy Revenues.