Dynamic effect of structural shocks on private investment in Iran

Abstract

Constraint of government investment to handle the global financial crisis revealed the importance of private investment function in the economy. However, economic instability and uncertainty have caused postpone in private investment. Therefore, this study aimed to find out the factors with the most stimulant effect on private investment in Iran. Hence, applying the secondary quarterly data of Iran cover the period of July 1988 until March 2015 is used to determine the impact of six private and public structural shocks on private investment based on the Dynamic Stochastic General Equilibrium (DSGE) model. The present study considers a combination of different variables of private investment behavior, namely capital, investment, the price of capital (Tobin’s Q), capital return, cost of capital utilization, and working hours as the endogenous variables. Second, investigating economy of a developing country, despite of most of the studies, which concentrate on developed economies. Third, evaluate the impact of liquidity as a monetary policy instrument in Iranian economy; and determine the distinction between public investment and current expenditures. The findings illustrated amongst private structural shocks, investment- specific technology shock convinces the private sector to invest at least in the short- run, as had persuaded them to deduct their consumption and increase their savings. Likewise, technology shocks affect positively the private investment behavior, unlike the two related technology shocks, the mark-up shock affects negatively the private investment indices. In addition, the micro-structural shocks, including government investment and current expenditures cause a crowding out effect on private investment in the short-run, but liquidity shock despite of positive impact on private investment can lead to speculation in the Iranian economy. Therefore, to persuade the private sector to invest, the policy makers should concentrate on micro structural shocks specially investment-specific technology and technology shocks.