The Effect of Key Macroeconomic Shock Variables on GDP in Iran: A Sign-Restricted Bayesian VAR Approach

This paper is to study the effect of key macroeconomic shock variables including exchange rate, broad money, stock price index, and supply shock effect on GDP growth rate in Iran by using a novel econometric method namely sign-restricted vector autoregressive (SRVAR). We use 5 variables in the model including GDP growth rate, broad money, exchange rate, stock price index, and inflation rate as well as quarterly data from 1370Q2 to 1395Q4 (1991Q3–2017Q1). We identify shocks by using Arias et al. (2014) algorithm. The empirical findings from impulse response functions indicate that negative supply shock declines the growth rate for about 5 periods. Positive exchange rate shock reduces the growth rate for about 4 periods and thereafter raises the growth rate. The monetary shock declines the growth rate after a short period. A positive stock market shock has a positive effect on the growth rate for about 3 periods, and thereafter decreases it. The forecast error variance decomposition (FEVD) indicates that the negative supply shock, monetary shock, and exchange rate shocks are the most important explainers of the GDP growth rate shock.