Analysis of the Effects of Monetary Shocks on Macro Variables in Iran a Bayesian VAR Approach

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Money and its effects on and from real variables are the key issues in macroeconomics.  Many studies have been accomplished for investigating the interaction between money and real sectors. The over-parameterization is the vital problem in Vector Autoregression Models. This problem is appeared more seriously in the cases of data restriction and lack of adequate observations (such as IRAN) and deviate the predictions. Thus we should look for a way for decreasing the number of parameters and restricting the model. The Bayesian approach is a good way for this purpose. This article addresses the effects of monetary shocks on the key variables of macro economy such as GDP and price general level. According to the tests carried out, the SSVS prior is more suitable in BVAR model. By calculating the posterior function we compute the Impulse Response Function. According to IRFs a monetary shock tends to the increase of GDP and price level. But the response of price level is relatively more rapid and more persistent. Hence, however using an expansionary monetary policy tends to the increase of GDP in short-run, but its inflationary cost causes a continuous and long-run increasing of price level.

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