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

Elahi, Naser; Heydari, Hasan; Kiaalhoseini, Seyed Ziaeddin; Abolhasani Chimeh, Mohammad Amin

doi:10.22075/jem.2019.17030.1267

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

Document Type : Original Article

Authors

naser elahi ¹

hasan heydari ²

seyed ziaeddin kiaalhoseini ³

Mohammad amin Abolhasani chimeh ⁴

¹ Associate Professor, Department of Economics, University of Mofid

² Assistance Professor, Department of Management and Economics, University of Tarbiat Modares

³ Assistance Professor, Department of Economics, University of Mofid

⁴ PhD. Student in Economics, Department of Economics, University of Mofid

10.22075/jem.2019.17030.1267

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