Intermediate Goods Trade and Macroeconomic Volatility: The Case of Iran-China Trade Relations

Abstract

This paper tries to analyze the impacts of intermediate goods trade on production, consumption, investment, net exports, employment, labor wage and capital rent of Iran in its bilateral trade relations with China. This analysis has been done by modeling, solving and calibrating an international real business cycles (IRBC) model in period 1980-2009. The results show that when elasticity of substitution between domestic and imported intermediate goods is low, increasing the share of Iran's imported intermediate goods from China increases volatility of Iran's macroeconomic variables. The value of an increase in volatility of Iran's macroeconomic variables depends on elasticity of substitution between domestic and imported intermediate goods, when the elasticity of substitution between domestic and imported intermediate goods is low, an increase in the share of Iran's imported intermediate goods from China leads to a further increase in the volatility of macroeconomic variables. These results indicate that imports of intermediate goods are an important path through for transmission of shocks between main bilateral trade partners.