Iran’s Economy

In the decade of 1979-1988, there was no development plan in Iran. During 1989-2022, six development plans implemented in Iran’s economy. The assessment of development plans conducted based on the performance and the results of economic indicators over the period. Economic Growth over the course of development plans was volatile. There has been a double-digit inflation rate over the course of the development plans and Productivity and the distribution of income indices were volatile. The challenges of planning in Iran include lack of common understanding on basic concepts of development plans, challenges of comprehensive plan, essential change due to external shocks, time span, parallel initiatives, coordination failure and lack of independent evaluation entity.

The positive impacts of fiscal policy could be undermined when accompanied by uncertainty. We examined the effect of fiscal policy uncertainty on economic activities in the provinces of Iran. It includes production, investment, unemployment, and economic participation of the active workforce in these provinces, taking into account the effects of economic sanctions imposed on the economy. We employed two types of shocks: fiscal level shock (representing fiscal policy) and its volatility shock (as fiscal policy uncertainty), which derived from a specified fiscal reaction function. We estimated a Panel VAR model using provincial data from 2003 to 2020. The results of the impulse response function indicated that following the impulse in the fiscal policy uncertainty, the response shows an increase in the unemployment rate in the short run, a decrease in the capital investment, and an increase in the inflation rate in the short and medium terms. In the medium and long term, the response indicates a decrease in GDP growth and a reduction in the economic participation rate of the active workforce.

Monetary policy is one of the most important tools for policymakers to influence macroeconomic variables including production. However, implementing this policy sometimes yields unintended consequences. Understanding monetary policy transmission mechanisms is therefore critical for effective implementation. Research following the 2008-2009 financial crisis indicates that the shadow banking activity can disrupt the monetary policy transmission and weaken its effectiveness. An analysis of Iran’s financial system reveals increasing shadow banking activity. This paper therefore examines how shadow banking affects monetary policy transmission in Iran using a DSGE model that innovatively incorporates the shadow banking sector. We compare two scenarios: a financial system without shadow banking and one including shadow banking. The effects of two contractionary monetary policies—interest rate increase and reductions in money supply growth—on GDP, investment, and inflation were analyzed under each scenario. The findings indicate that shadow banking diminishes monetary policy’s impact on all three variables by weakening the credit channel of monetary policy transmission. In the scenario without shadow banking, In the scenario without shadow banking, all three variables will decline in response to the monetary shock of decreasing money supply growth. However, in the scenario with shadow banking, investment levels are not declining but rising. The impact of monetary policy on output and inflation is diminished in the presence of shadow banking. In the case of interest rate shocks, the results also indicate a negative impact of shadow banking on the effectiveness of monetary policy.