Government Expenditure, Risk and Return: A Framework for a New Keynesian Model in the Iranian Economy

According to the studies, capital expenditure shocks are one of the most important factors affecting the capital market (stock market). Since economic modeling based on the Dynamic Stochastic General Equilibrium (DSGE) Modeling is one of the best tools for understanding the mechanisms behind the effect of economic shocks on risk and stock returns, the present study proposed a new Keynesian model to explore the impact of capital expenditure shocks on risk and stock return to the Iranian economy. The results showed that capital expenditure shocks have a negative impact on systematic risk and stock returns, and then by decreasing their impact, such shocks returned to equilibrium very quickly in the next periods.