Abstract

Oil is one of the main revenue resource and the fundamental input in production process in oil exporting countries; so that oil price fluctuations can cause instability in the key macroeconomic variables in an oil-rich country like Iran. In this paper, to investigate the effect of oil price shocks on the macroeconomic variables of Iran, a Multi Sectors Dynamic Stochastic General Equilibrium model, with emphasis on optimization of oil sector as a producing sector and considering the subsidy of oil price is designed. Furthermore the current study pays special attention to lack of law of one price as a main source of inefficiency in developing open economies. This is done via modeling of import sector and including those importers who are capable of setting their prices. The impact of oil price shocks on the Dynamics of the economic variables is considered in the 1988:1-2011:1 period. For this purpose, the Bayesian approach is used to estimate the model. The impulse response functions show that immediately after an oil price shock, capital and output increase in the oil sector while, in the non-oil sector the result is reverse. Furthermore, GDP, consumption and inflation increase, while the real exchange rate decreases immediately,  And then all of the variables converge to their steady state values.