The Effects of Tax Shocks on GNP and Inflation in Iran, A DSGE Approach

Abstract

This study investigates indirect tax shocks' influences on GDP and inflation in Iran’s economy, using a DSGE (Dynamic Stochastic General Equilibrium) model. The results indicate that a shock cause equal to one standard deviation in tax on consumption can reduce GDP by 0.006% and inflation by 0.018%. Also, a shock in the import tax causes the GDP to decrease by 0.089% due to the decrease in demand for imported goods. Moreover, imported goods reduce by 0.4% with the occurrence of import tax shock; meanwhile, inflation increases by 0.89% in the short term. Accordingly, a possible reform for indirect taxes should be more carefully considered.