Agricultural Economic Dynamics in a Bayesian DSGE Model for Iran

Iran’s economy is suffering from sharp and persistent economic shocks and agriculture plays an undeniable role in its economic growth and development. The aim of this paper is to study the relative contributions of various macroeconomic shocks to generating fluctuations in Iran’s agriculture sector. To do so, a Dynamic Stochastic General Equilibrium (DSGE) model, emphasizing on the agricultural sector, is developed. The model is estimated with Bayesian techniques using 9 macroeconomic variables. The findings indicate that agricultural productivity shock is the main driver of the economic fluctuations in the sector. Monetary shock and, to a lesser extent, government spending, preference and labor supply shocks, however, play an important role in agricultural dynamics. The two other shocks considered (oil revenue and money demand) are of less importance relatively. The historical decomposition shows after 2009, when imposed economic sanctions against Iran increase, the monetary shock becomes one of the main sources in explaining agricultural fluctuations. The results further confirm the symptoms of Dutch Disease (DD) in Iran’s agriculture.