Productivity, Crude Oil Supply Shocks and the Economy of Iran in a Dynamic Stochastic General Equilibrium Framework

Abstract

This paper investigates the responses of key macroeconomic variables—including output, consumption, investment, capital accumulation, and employment—to productivity and oil market shocks in Iran. Using quarterly data from 1975 to 2024, we estimate an RBC DSGE model and further calibrate a variant incorporating oil supply shocks. The results show that positive productivity and oil shocks generate immediate expansions in output, consumption, investment, labor hours, and wages, reflecting strong short-term multipliers and forward-looking behavior by households and firms. However, these gains are temporary, with impulse responses following a hump-shaped path and gradually declining as shocks dissipate, capital depreciation sets in, and policy or market frictions emerge. This underscores the transient nature of both productivity and oil windfalls and the need for policies that mitigate short-run volatility while fostering structural reforms and diversification. For an oil-dependent economy such as Iran, the findings highlight that while shocks can stimulate activity in the short term, sustainable long-run growth requires institutional mechanisms to channel temporary gains into lasting development.