How Do Agricultural Subsectors Respond to Productivity Shocks? Evidence from a Bayesian DSGE Model in Iran

Understanding the dynamics of productivity shocks is instrumental if we are to identify the sources of economic growth. This paper, investigates dynamic effects of positives productivity shocks to agricultural subsectors during the period from 19912015, by disaggregating agricultural sector in Iran into four key subsectors (crops, livestock, fishing and forestry) through an estimated DSGE model. Our Bayesian estimation results suggest that positive productivity shocks lead to an increase in output, consumption, capital, employment and real wages and a fall in marginal costs and price indexes in all four subsectors. Comparing the results across the subsectors shows that following the shocks, generally, crops and livestock have the strongest reactions and forestry has the weakest ones. Additionally, among the variables, output indicates the highest responses to the shocks. Variance decomposition analysis reveals that agricultural fluctuations are mainly explained by productivity, monetary, preference and government spending shocks.