The Effect of Trade Openness and Government Size on Macroeconomic Volatility in Iran: A Stochastic Volatility Model (SVM) Approach

Dashtban Farooji, Majid; Elyaspour, Behnam; Abbasnezhad, Masoud

doi:10.22075/jem.2019.16258.1222

The Effect of Trade Openness and Government Size on Macroeconomic Volatility in Iran: A Stochastic Volatility Model (SVM) Approach

Document Type : Original Article

Authors

Majid Dashtban Farooji ¹

Behnam Elyaspour ¹

Masoud Abbasnezhad ²

¹ Assistant Professor, Department of Economics, University of Bojnord

² MA in Economics, University of Bojnord

10.22075/jem.2019.16258.1222

Abstract

The main purpose of this paper is to examine the effect of trade openness and government size on macroeconomic volatility. Economic theories do not clearly show the effects of trade openness and government size on macroeconomic volatility. Therefore, this is essentially an empirical problem. Hence, we have presented an empirical model to test the effect of trade openness and government size on macroeconomic volatility in Iran over the period of 1352-1395. For this, first, the macroeconomic uncertainty was extracted using stochastic volatility model with leverage effects by technique of principal component analysis. The results showed that in the long run, trade openness and government expenditures have a positive effect on macroeconomic volatility in Iran. In addition, in the short run, there is no significant relationship between the relevant variables and macroeconomic volatility.

Keywords

Government Size

Trade Openness

Macroeconomic Volatility

Stochastic Volatility Model with Leverage Effect