The Financial Crisis Impact on Potential Output in Iran

In this study the quarterly data from 1996:1-2011:2 have been used to investigate the effect of financial crisis on potential output in Iran. For this purpose potential output, natural unemployment rate, spread between short-run and long-run interest rate and real money supply variables are used to estimate Auto Regressive Model and analyze Impulse-Response function and Variance Decomposition. The results show that financial crisis has negative impact on potential output in Iran. Also, monetary shocks have negative impact on potential output in Iran. As regards, monetary policy have no effect on actual output in long-run, it seems that monetary policies have considered the long-run targets. Variance decomposition of potential output shows that, potential output is influenced from natural unemployment about 51 percent and spread between short-run and long-run interest rate variable is influenced about 45 percent from real money supply in long-run. Also in this investigation, we used the Blanchard and Quah decomposition to decompose the real GDP to temporary and permanent shocks. The results suggest that permanent shocks have accumulated affect. These shocks have negative impact on output in Iran in long-run and temporary shocks have no impact on output and unemployment in long-run.