Investigating the Effect of Trade Shocks on employment in tradable and non-tradable sectors in Iran: A Dynamic Stochastic General Equilibrium Model (DSGE)

The aim of this paper is the analysis of trade shocks on tradable and non-tradable employment. To do so, a dynamic stochastic general equilibrium model is designed for Iran economy and the sectors of model are tradable, non-tradable and import. The variables related to foreign trade sector are nominal and real exchange rate, the law of one price gap and terms of trade. The structural parameters of this model is estimated by using Bayesian method and quarterly data on the 1383 – 1398 period. Based on estimation results, occurring a positive terms of trade shock leads to an increase in the employment of import sector but reduction in tradable and non-tradable sectors employment. Moreover, a positive shock of real exchange rate leads to a reduction in the employment of all sectors. Thereby, the policy recommendation of recent study is that the central bank should adjust its policy tool actively in responses to trade and exchange rate shocks in order to minimize its negative effects on the output and employment.