Structural Macroeconomic Capacity to a Reaction in Economic Policy Shocks : The Case of Iran

          The aim of this paper is to simulate the effects of some macroeconomic policy tools on production and inflation of Iran by the current worldwide financial and real crisis. The theoretical framework of the analysis is based on the so-called ‘IMF/World Bank Integrated Model’ which is the synthesis (a merger) of the basic monetary approach of the Balance of Payments used at the Fund for designing its adjustment programs, and of the growth Harrodian type model, used at the Bank for its macroeconomic projections for an open economy. This integrated Model has been calibrated for the Iranian case, over the period 1979-2009, and its empirical form has been used for estimating the effects on global output and inflation of three channels of economic policy: restriction in government spending, changes in domestic credit policy as well in exchange rate. The dynamic simulation results, over the period 2006-2009, show that a decrease in government spending is an appropriate policy to reduce the inflationary pressures, even though it has negative effect on economic growth, the domestic credit expansion to private sector creates economic growth considerably higher than an increase in the level of consumer price while devaluation has not had considerable effect on economic growth through exports or imports.       JEL Classification: E00, E21, E22, E50, E51, E52     [1] Corresponding Author, Email: [email protected]