In this paper we examine the effects of nominal variables on the GDP gap in Iran. The potential GDP is obtained by Prescott filtering method.
A VAR model is set up & estimated for GDP gap, inflation, market exchange rate growth, and liquidity growth.
The results show that nominal variable shocks influence the GDP gap in Iran in the same direction. Stability of these shocks indicates their long-run effect on the system. Thus, for economic growth, the economic policy must concentrate on production increases, which would affect the long run production.
