Dual Labour Market in Dynamic Stochastic General Equilibrium Model of Iran (Money and Oil Revenue Shocks)

A New-Keynesian model for Iran's economy with dual labor market has been applied in this study to survey how economy reacts to money and oil revenue shocks. The substantial share of informal employment in Iran, on one hand and the government dependence to oil revenues, on the other hand, make it necessary to design a dynamic stochastic general equilibrium model based on Iran's economic features. In this study, the central bank conducts monetary policy by targeting the money growth rate. The outcomes revealed that this model can describe the data of Iran's economy; also the impulse responses to shocks are theoretically sound. The reaction functions of the monetary policy can explain the real data during 2002–2011. As common in the literature the money shock has no real effect without rigidities. The inflation becomes less responsive to shocks in the presence of informal labor market. As the empirical evidence shows the informal labor market acts as a buffer, increasing the flexibility of the labor market and affecting the transmission mechanism of monetary policy.