The Effect of Institutional Quality on Business Cycle and the Dynamics of Macroeconomic Variables in Iran

Document Type : Original Article

Authors

1 Ph.D Candidate in Economics, Faculty of Economics, Management and Social Sciences, Shiraz University, Shiraz, Iran

2 Professor of Economics, Faculty of Economics, Management and Social Sciences, Shiraz University, Shiraz, Iran

3 Associate Professor of Economics, Faculty of Economics, Management and Social Sciences, Shiraz University, Shiraz, Iran

Abstract

Institutional quality is one of the key determinants of the economic performance of countries. The literature lacks a formal model to address the role of institutional quality changes in the macroeconomic dynamics of a developing economy. Using a new Keynesian dynamic stochastic general equilibrium framework and incorporating rent-seeking technology, this study investigates the effect of institutional quality shocks on the business cycle and the dynamic behavior of key macroeconomic variables in Iran. Our modeling allows us to show how institutional quality affects behavior of households, firms, government, and the central bank. The model is solved and calibrated for the period 1984-2017. The results indicate that better institutional quality increases private consumption, government spending, and non-oil production through increasing productive activities, decreasing transaction costs, improving productivity, enhancing investment, and promoting more effective monetary and fiscal policies. More specifically, policymakers should take certain measures to improve the quality of institutions in Iran through boosting government stability, fighting corruption, controlling rent-seeking activities, improving law and order, increasing democratic accountability, and bureaucracy quality. These findings might have important policy implications for policymakers in Iran.

Keywords


- Abrishami, H., Mehara, M. & Zamanzadeh, H. (2014). The effect of oil shocks on the performance of Iranian economy: A DSGE Approach. Quarterly Energy Economics Review, 10 (41), 195-223 (In Persian).
- Acemoglu, D., Naidu, S., Restrepo, P. & Robinson, J. A. (2019). Democracy Does Cause Growth. Journal of Political Economy, 127(1), 47-100.
- Acemoglu, D., Robinson, J. A. & Verdier, T. (2017). Asymmetric Growth & Institutions in an Interdependent World. Journal of Political Economy, 125(5), 1245-1303.
- Acemoglu, D. & Robinson, J. A. (2010). The Role of Institutions in Growth and Development. Review of Economics and Institutions, 1(2), 1 -33.
- Angelopoulos, K., Economides, G. & Vassilatos, V. (2011). Do Institutions Matter for Economic Fluctuations? Weak Property Rights in a Business Cycle Model for Mexico. Review of Economic Dynamics, 14(3), 511–531.
- Angelopoulos, K., Philippopoulos, A. & Vassilatos, V. (2009). The social cost of rent seeking in Europe. European Journal of Political Economy25(3), 280–299.
- Canova, F., Ciccarelli, M. & Ortega, E. (2012). Do Institutional Changes Affect Business Cycles? Evidence from Europe. Journal of Economic Dynamics and Control, Elsevier, 36(10), 1520-1533.
- Coase, R. (1960). The Problem of Social Cost. Journal of Law and Economics, 3, 1–44.
- Damiri, F., Eslamloeean, K., Hadiyan, E. & Akbariyan, R. (2017). The Effects of Oil Shock on Trade Balance and Macroeconomic Variables in Iran Using a Dynamic Stochastic General Equilibrium Model. Journal of Applied Economics Studies in Iran, 6(23), 35-60 (In Persian).
- Dehghan-manshadi, M. (2020). The Role of Institutional Quality Changes from Oil Shocks in Macroeconomic Dynamics of an Oil Exporting Country: The Case Study of Iran.  PhD Dissertation. Shiraz University (In Persian).
- Dehghan-manshadi, M., Eslamloueyan, K., Hadian, E. & Dehghan-Shabani, Z. (2020). Oil Shocks, Institutional Quality Change and Macroeconomic Dynamics in Iran. Quarterly Journal of Economic Research, In Press (In Persian).
- Duncan, R. (2014). Institutional Quality, the Cyclicality of Monetary Policy and Macroeconomic Volatility. Journal of Macroeconomics, 39, 113–155.
- Fazio, D., Silva, T., Christiano, T., Miranda B. & Daniel O. (2018). Inflation targeting and financial stability: Does the quality of institutions matter? Economic Modelling, 71, 1-15.
- FeyziYengjeh, S., HekmatiFarid, S. & Yahyavi Miyavagi, S. (2017). Impact of Oil Resource Rent on Good Governance Indicators of the Oil Exporting Countries. Iranian Journal of Economic research, 22(71), 189-218 (In Persian).
- Fotros, M., Tavakolian, H. & Maaboudi, R. (2015). Impact of Fiscal and Monetary Shocks on Macroeconomic Variables in Iran, Dynamic Stochastic General Equilibrium Approach 1961-2012. Quarterly Journal of Economic Growth and Development Research, 5(19), 94-73 (In Persian).
- Grigoli, F. & Mills, Z. (2014). Institutions and public investment: an empirical analysis. Economics of Governance, 15(2), 131-153.
- Hamilton, J. D. (2003). What is an oil shock? Journal of Econometrics, 113(2), 363–398.
- Hall, P. & Taylor, R. (1996). Political Science and the Three New Institutionalisms. Political studies, 44(5), 936–957.
- Hillman, A. (2003). Public Finance and Public Policy: Responsibilities and Limitations of Government, Cambridge University Press.
- Huang, H. and Wei, S. (2006). Monetary policies for developing countries: The role of institutional quality. Journal of International Economics, 70, 239–252.
- http://tsd.cbi.ir.
- Jafari Samimi, A., Balounejad Nouri, R., Tranchian, A. (2016). An Investigation of the Impact of Oil Revenue Shocks on Output and Inflation under Conditions of Price and Wage Stickiness. Quarterly Energy Economics Review. 12 (48), 1-32 (In Persian).
- Jafari, M. & Eslamloueyan, K. (2017). The Effect of Non-Renewable Energy on Institutional Quality and Production in the Iranian Economy: An Application of the State-Space Model. Quarterly Energy Economics Review. 13 (53), 1-33 (In Persian).
- Kasaipour, N. & Erfani, A. (2018). Optimal Cyclical Behavior of Monetary Policy of Iran: Using a DSGE Model. Iranian Journal of Economic Studies, 7(1), 61-79.
- Manzoor, D., Taghipour, A. (2016). A dynamic stochastic general equilibrium model for an oil exporting and small open economy: the case of Iran. 23 (75):7-44 (In Persian).
- Meenagh, D., Minford P., Michael W. & Xu, Y. (2019). Testing DSGE Models by Indirect Inference: a Survey of Recent Findings. Open Economies Review, 30(3), 593-620.
- Moeinifard, M. & Mehrara, M. (2015). Effect of Abundance of Natural Resources on Governance Guality in Developing Countries. Economic Development Policy, 3(4), 9-32 (In Persian).
- Mobarak A., HojabrKiani K., Memarnejad A. & Peykarjou K. (2018). Investigating the Effects of Institutional Quality and Human Capital on Economic Growth (Case Study of Developing and Developed Countries). The Journal of Planning and Budgeting, 23 (1), 117-146 (In Persian).
- Mohammadi, T., Raanaei, A. & Darabi, M. (2019). The Role of Institutional Quality in the Technical Efficiency of the Selected Countries of Asia and the Middle East: Stochastic Frontier Analysis Approach. Journal of Economics and Modeling, 10(3), 127-156 (In Persian).
Motavaseli, M. & Aghababaie, R. (2006). Pathology of the Banking System in Iran: An Institutional Approach. Journal of Economic Research (Tahghighat- E- Eghtesadi), 41(1), 93-130 (In Persian).
- Mueller, D. (2003). Public Choice III, Cambridge University Press.
- North, D. C. (1991). Institutions. Journal of Economic Perspectives, 5, 97-112.
- North, D. C. (1994). Economic Performance through Time. The American Economic Review, 84(3), 359-368.
- North, D. C. (2000). Big-Bang Transformations of Economic Systems - An Introductory Note. Journal of Institutional and Theoretical Economics (JITE), 156(1), 1-3.
- North, D. C., Wallis, J., Joseph, W., & Barry, R. (2009). Violence and the Rise of Openaccess Orders. Journal of Democracy, 20(1), 55 -68.
- North, D. C. & Weingast, B. R. (1989). Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England. Journal of Economic History, 49(4), 803-832.
- Ostrom, E. (2008) .Doing Institutional Analysis, Digging Deeper than Market and Hierarchies. Handbook of New Institutional Economics, 819 -848.
- Parsa, H., Hadian, E., Samadi, A. & Zibaei, M. (2015). The Investigation of Oil Revenues Management Strategy on Macroeconomic Performance in Iran. Journal of Applied Economics Studies in Iran, 4(15), 107-131 (In Persian).
- Rodrik, D. (2008). One Economics, Many Recipes Globalization, Institutions, and Economic Growth. Princeton University Press.
- Sayadi, M., Shakeri, A., Mohammadi, T. & Bahrami, J. (2016). Stochastic Shocks and Oil Revenue Management in Iran; A Dynamic Stochastic General Equilibrium Approach. Economics Research, 16(61), 33-80 (In Persian).
- Shiravand, F., mazhari, R., mohamadikhiareh, M. & tomhj, A. (2019). The Effect of Official and Unofficial Institutional Factors on Entrepreneurship and Its Consequences on Economic Growth: Evidence from MENA Countries (2008-2015). Journal of Economic Research (Tahghighat- E- Eghtesadi), 54(1), 209-232 (In Persian).
- Tavakolian, H., Komijani, A. (2012). Monetary Policy under Fiscal Dominance and Implicit Inflation Target in Iran: A DSGE Approach. Journal of Economic Modeling Research (JEMR). 2 (8), 87-117 (In Persian).
- Tavakolian, H. & Sarem, M. (2017). DSGE Modeles in DYNARE (Modeling, Solution and Estimation for Iran). Monetary and Banking Research Institue of Cetral Bank of the Islamic Republic of Iran press (In Persian).
- Uhlig, H, (1997). A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily, Center for Economic Research, University of Tilburg.
- Walsh, C. E. (2003). Monetary Theory and Policy. Second Edition, Massachusetts Institute of Technology press.
- Williamson, O. (2000).The New Institutional Economics: Taking Stock, Looking Ahead. Journal of Economic Literature, 38(3), 595-613.
- Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press.