Structural Macro-economic Capacity to React to Economic Policy Shocks for Fighting the Effects of the Current Worldwide Crisis. The case of Iran

The aim of this chapter is to simulate the effects of some macroeconomic policy tools on production and inflation in an emerging economy affected by the current worldwide financial and real crisis, the Islamic Republic of Iran. The theoretical framework of our analysis is based on the so called “IMF/World Bank Integrated Model” which is the synthesis (a merger) of the basic monetary approach of the Balance of Payments used at the I.M.F for designing its adjustment programs, and of a growth Harrodian type model, used at the Bank for its macroeconomic projections for an open economy. This “Integrated Model” has been calibrated for the Iranian case, over the period 1979-2009, and its empirical form has been used for estimating the effects on global output and inflation of three channels of economic policy : restriction in government spending, changes in domestic credit policy as well as in exchange rate policy. The dynamic simulations results, over the period 2006-2009, show that a decrease in government spending is an appropriate policy to reduce the inflationary pressures, even though it has a negative effect on economic growth; the domestic credit expansion to private sector results in an economic growth rate considerably higher than the increase in the level of consumer price and a devaluation has not a considerable effect on economic growth through exports or imports.