Investigating the effect of global prices on the dynamics of Iran's economy with an emphasis on food inflation in the framework of dynamic stochastic general equilibrium model

Purpose: Commodities are very important as production inputs and raw materials in industrial and agricultural productions, as well as for basic needs provision in different countries. The global price shocks of Commodities affect business cycle fluctuations of countries and their spillover effects on key macroeconomic variables such as inflation, production, and exchange rate. So, many researchers and policymakers in recent years especially in the era of COVID 19 and the war between Ukraine and Russia emphasis this subject. In the first step, Global prices increase domestic inflation through increasing the price of food imports and then increasing the cost of household consumption basket. In the next step, real sector of the economy is affected and macroeconomic balance disruptance appears through various channels, such as trade sector, financial systems and investment. Note that the variation of production depends on the economic structure, the size of the economy and country's openness degree of trade. Although macroeconomic variables such as inflation and production are influenced from global price shocks, however, it is difficult to measure their impulses. So, in this study, the impact of global commodity prices (oil and foods) on Iran's economy is examined by using dynamic DSGE approach.

Methodology: this research investigate the effects of global commodity (oil and foods) prices on Iran's macroeconomic variables (such as inflation, production, cosumption and emplotment) with an emphasis on the food sector during the 1380-1400. For this purpose, the effect of global price shocks on inflation and growth (based on the impulse response function) is presented via DSGE approach. So, The main variables of these study, include oil price (OILP), world food price (WFP), real exchange rate (REER), wholesale price index (WPI) and domestic food price index (FOODP). In this study, a two-country DSGE model is designed with an emphasis on the country that exports oil and imports food. The model is designed in such a way that the impulses on the supply and demand side of oil and food can be identified on the macroeconimic variables separately. In fact research model is set folowing Oladouni (2020) in the form of a two-country open stochastic dynamic general equilibrium model based on the New Keynesian perspective. This model has household, firm (one final producer and three intermediate firms), foreign sector (foreign firm and importers), government and central bank sectors. The innovation of this research is that, in addition to endogenously considering oil production, it has investigated other factors affecting domestic inflation. In this model, it is assumed that the real GDP is followed a random walk process and Equilibrium real interest rate and equilibrium real exchange rate are univariate time series models. The inflation rate is explained based on the new Keynesian Phillips curve.

Findings and Discussion: The results of the study using the seasonal data of 1380-1400 and the Bayesian estimation technique indicate that the changes in global food prices are an important and significant factor in causing overall inflation as well as food inflation in the country. More precisely, the results show that although in the first step due to the increase in oil exports, the oil price impulse leads to an increase in total production, employment and consumption temporarily, but after a one period, changes in the exchange rate lead to a decrease in exports, domestic goods and the increase in the import of intermediate goods and finally causes a decrease in production and an increase in inflation, especially food inflation in the short term (during two periods). However, in the long run, they converge to their equilibrium value. The important point in this situation is that, the amount of consumption of tradable (imported) edible goods is reduced and replaced by non-tradable ones. On the other hand, the results show that the global food price shock increases the price of tradable food products. An increase in the price of tradable food goods increases the price of non-tradable ones. Moreover, the decrease in money supply through the exchange rate channel leads to an increase the demand for non-food tradable goods and their prices also increase and inflationary pressure increases. The poorer a country is, the greater the share of non-tradable food commodities in inflation, and the global food price shock will have higher inflationary effects.

Conclusion and Policy Implications: it is clear that identifying the Causes of inflation especially food price, is one of the key aspect of policy-maker in order to deal with the crisis, especially in a situation of war, disease and stagflation. As the results showed, global commodity prices, along with exchange rate changes, transfer to domestic economy and effect the macroeconomic variables such as inflation and output after about three month. So, it will be important for government to control the sector or commodity inflation and to make an effort to provide enough food products, considering the 3-month opportunity to transfer the shock. In this regard, it is suggested that in order to control inflation, at least in short term, in the field of trade of inputs and agricultural products, some instruments should be used to limit their export. In addition, it is suggested that in a long-term planning, the monetary and banking laws of the country should be reformed and also by reducing the government's dominance over the monetary policy, the negative effects on the real sector will be reduced.