Bayesian DSGE Modeling of Energy Prices, Public Debt, and Macroeconomic Policy in Iran: A Fiscal and Monetary Policy Perspective

This paper develops a Bayesian Dynamic Stochastic General Equilibrium (DSGE) model to analyze the macroeconomic effects of energy prices, public debt, and government spending in Iran. The study addresses critical gaps in the literature by explicitly incorporating energy subsidies and fiscal policy interactions into a DSGE framework tailored to Iran's unique economic structure. Using Bayesian estimation techniques, the model is estimated with quarterly time-series data from ۲۰۰۰ to ۲۰۲۰, allowing for a nuanced understanding of the transmission mechanisms of energy price shocks, fiscal dynamics, and subsidy reforms. The results reveal that energy price fluctuations have a significant impact on macroeconomic stability, with a one-unit increase in energy prices leading to a ۰.۵% contraction in output and contributing to wage-driven inflationary pressures. Agricultural exports are also highly sensitive to energy prices, with higher costs reducing competitiveness and exacerbating trade imbalances. Fiscal policy interactions highlight the trade-offs between government spending and public debt accumulation, with increased spending stimulating output but raising debt levels. Monetary policy is found to be effective in stabilizing output and inflation, though it cannot fully offset the inflationary effects of energy price shocks. Subsidy mechanisms, while partially mitigating energy price shocks, create fiscal constraints that limit long-term sustainability. Policy implications suggest the need for gradual energy subsidy reforms, coordinated fiscal and monetary policies, and targeted social safety nets to protect vulnerable populations during economic transitions. These findings provide valuable insights for policymakers in Iran and other resource-dependent economies facing similar challenges, emphasizing the importance of balancing fiscal sustainability with macroeconomic stability in the face of external shocks.

Keywords:

DSGE models , Bayesian estimation , energy prices , public debt , fiscal policy , Iran