The Effect of Monetary Policy Shock on Government Debt Using the Dynamic Stochastic General Equilibrium Approach

Document Type : Original Article

Authors

1 پردیس کیش دانشگاه تهران

2 استاد دانشکده اقتصاد دانشگاه تهران

3 دکتری تخصصی دانشکده اقتصاد دانشگاه تهران

Abstract

The aim of the present study was to examine the effect of a monetary policy shock on government debt in the Iranian economy. To analyze the impact of the shock, a Dynamic Stochastic General Equilibrium (DSGE) model was employed using data for the period 1991–2024. The results indicate that a monetary policy shock leads to an increase in the inflation rate in the short run, with its effects diminishing over the long run. In addition, the monetary policy shock results in an increase in the monetary base, bank lending, and economic growth. The findings further show that the monetary policy shock reduces government debt; however, the effects of this policy fade in the long run. Moreover, the shock reduces households’ real purchasing power through higher inflation and thereby exerts a negative impact on consumption. Government tax revenues also decline as a result of changes in economic conditions and a relative reduction in taxable activities. Given these consequences, it is recommended that policymakers, in order to achieve sustainable financing of government expenditures, shift away from reliance on money creation or debt issuance and instead focus on supply-side policies, the strengthening of productive capacity, and the enhancement of sustainable sources of income in the economy. Such an approach can expand the tax base through economic growth, improve tax revenues, and at the same time generate fewer adverse inflationary and distributional effects on the macroeconomy. Given these consequences, it is recommended that policymakers, in order to achieve sustainable financing of government expenditures, shift away from reliance on money creation or debt issuance and instead focus on supply-side policies, the strengthening of productive capacity, and the enhancement of sustainable sources of income in the economy. Such an approach can expand the tax base through economic growth, improve tax revenues, and at the same time generate fewer adverse inflationary and distributional effects on the macroeconomy.

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History

  • Receive Date: 08 August 2026
  • Revise Date: 01 October 2026
  • Accept Date: 04 October 2026

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