Volume 25, Issue 4 (Winter 2021)                   JPBUD 2021, 25(4): 5-46 | Back to browse issues page


XML Persian Abstract Print


Download citation:
BibTeX | RIS | EndNote | Medlars | ProCite | Reference Manager | RefWorks
Send citation to:

Madanizadeh S A, Ebrahimian M. (2021). Modeling Energy Price Liberalization in Iran Economy. JPBUD. 25(4), 5-46. doi:10.52547/jpbud.25.4.5
URL: http://jpbud.ir/article-1-1938-en.html
1- Faculty of Management and Economics, Sharif University of Technology, Tehran, Iran , madanizadeh@sharif.edu
2- Wharton Business School, University of Pennsylvania
Abstract:   (2875 Views)

This paper attempts to analyze the macroeconomic effects of energy price liberalization and redistribution of its proceeds to households. Energy price control and energy subsidies are of the most popular supportive policies in the economy of‌ Iran. Nonetheless, increasing the energy price of households and firms has been exercised in recent years to counter the government budget deficit. In 2008, the government proposed a reform: energy price liberalization and redistribution of its proceeds to the household. In this paper, we analyze the macroeconomic effects of this policy according to different scenarios. In view of monetary aggregate control policy, our results show that in addition to a decline in energy intensities of households and firms, the average household’s welfare increases. Most of this increase happens in the short-run as households’ real incomes rise more in the short run. Moreover, we find that this reform results in a decline in labor supply due to the subsidy distribution, and hence a decline in both output and capital accumulation in the short run and the long run. In the scenario where only the household’s energy price rises, results are qualitatively similar with a smaller quantitative effect. Finally, it is important to note that a complete analysis of this reform should include 1) the technological progress that can be associated with a reform, 2) implementing a monetary policy that is more consistent with Iran’s institutional arrangement and 3) the political economy aspects of the reform, which are all out of the scope of this paper.

Full-Text [PDF 4022 kb]   (1122 Downloads)    
Type of Study: Research | Subject: Macroeconomics
Received: Sep 24 2020 | Accepted: Mar 07 2021 | ePublished: Aug 11 2021

References
1. Abounouri, E., Shahmoradi, A., Taghi Nezhad Omran, V., & Rajaie, M. (2014). The Macroeconomic Effects of Energy Price Shocks: Introducing a Dynamic Stochastic General Equilibrium Model. Quarterly Energy Economics Review, 10(39), 21-49. http://iiesj.ir/article-1-336-en.html
2. Aguiar‐Conraria, L., & Wen, Y. (2007). Understanding the Large Negative Impact of Oil Shocks. Journal of Money, Credit and Banking, 39(4), 925-944. https://doi.org/10.1111/j.1538-4616.2007.00051.x
3. Alesina, A., & Drazen, A. (1991). Why Are Stabilizations Delayed? The American Economic Review, 81(5), 1170-1188.
4. Backus, D. K., & Crucini, M. J. (2000). Oil Prices and the Terms of Trade. Journal of International Economics, 50(1), 185-213. https://doi.org/10.1016/S0022-1996(98)00064-6
5. Barsky, R. B., & Kilian, L. (2001). Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative. NBER Macroeconomics Annual, 16(1), 137-183.
6. Bernanke, B. S. (1983). Irreversibility, Uncertainty, and Cyclical Investment. The Quarterly Journal of Economics, 98(1), 85-106. https://doi.org/10.2307/1885568
7. Bernanke, B. S. (2006). Energy and the Economy. Board of Governors of the Federal Reserve System (U.S.).
8. Bodenstein, M., Erceg, C. J., & Guerrieri, L. (2011). Oil Shocks and External Adjustment. Journal of International Economics, 83(2), 168-184. https://doi.org/10.1016/j.jinteco.2010.10.006
9. Bresnahan, T. F., & Ramey, V. A. (1993). Segment Shifts and Capacity Utilization in the US Automobile Industry. The American Economic Review, 83(2), 213-218.
10. Davis, S. J. (1987). Allocative Disturbances and Specific Capital in Real Business Cycle Theories. The American Economic Review, 77(2), 326-332.
11. Dewatripont, M., & Roland, G. (1995). The Design of Reform Packages under Uncertainty. The American Economic Review, 85(5), 1207-1223.
12. Dhawan, R., & Jeske, K. (2008). Energy Price Shocks and the Macroeconomy: The Role of Consumer Durables. Journal of Money, Credit and Banking, 40(7), 1357-1377. https://doi.org/10.1111/j.1538-4616.2008.00163.x
13. Edelstein, P., & Kilian, L. (2007). The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses about the Transmission of Energy Price Shocks. The BE Journal of Macroeconomics, 7(1). https://doi.org/10.2202/1935-1690.1607
14. Farazmand, H., Arman, S. A., Afghah, S. M., & Ghorbannezhad, M. (2016). The Effects of Energy Price Reform on Iranian Economy: Dynamic Stochastic General Equilibrium Approach (DSGE). Quarterly Journal of Applied Theories of Economics, 3(2), 49-76.
15. Fernandez, R., & Rodrik, D. (1991). Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty. The American Economic Review, 81(5), 1146-1155.
16. Ghoddusi, H., Rafizadeh, N., & Rahmati, M. H. (2018). Price Elasticity of Gasoline Smuggling: A Semi-Structural Eestimation Approach. Energy Economics, 71(1), 171-185. https://doi.org/10.1016/j.eneco.2018.02.008
17. Hamilton, J. D. (1988). A Neoclassical Model of Unemployment and the Business Cycle. Journal of Political Economy, 96(3), 593-617.
18. Hamilton, J. D. (2008). Oil and the Macroeconomy: The New Palgrave Dictionary of Economics.
19. Herrera, A. M. (2007). Inventories, Oil Shocks and Macroeconomic Behavior. Department of Economics, Michigan State University.
20. Khiabani, N., & Tavassoli, S. (2020). A Review of Energy Demand Models. The Journal of Planning and Budgeting, 25(3), 65-94. http://jpbud.ir/article-1-1965-fa.html
21. Kilian, L. (2008). The Economic Effects of Energy Price Shocks. Journal of Economic Literature, 46(4), 871-909.
22. Kim, I.-M., & Loungani, P. (1992). The Role of Energy in Real Business Cycle Models. Journal of Monetary Economics, 29(2), 173-189. https://doi.org/10.1016/0304-3932(92)90011-P
23. Kosmo, M. (1987). Money to Burn? The High Costs of Energy Subsidies: World Resources Institute.
24. Kosmo, M. (1989). Commercial Energy Subsidies in Developing Countries Opportunity for Reform. Energy Policy, 17(3), 244-253. https://doi.org/10.1016/0301-4215(89)90049-9
25. Lee, K., & Ni, S. (2002). On the Dynamic Effects of Oil Price Shocks: A Study Using Industry Level Data. Journal of Monetary Economics, 49(4), 823-852. https://doi.org/10.1016/S0304-3932(02)00114-9
26. Lin, B., & Jiang, Z. (2011). Estimates of Energy Subsidies in China and Impact of Energy Subsidy Reform. Energy Economics, 33(2), 273-283. https://doi.org/10.1016/j.eneco.2010.07.005
27. Ljungqvist, L., & Sargent, T. J. (2018). Recursive Macroeconomic Theory: MIT Press.
28. Madanizadeh, S. A., & Ebrahimian, M. (2018). Designing and Calibrating a Core General Equilibrium Macro Model for the Iran’s Economy. Journal of Economic Research and Policies, 25(84), 7-42. http://qjerp.ir/article-1-1627-fa.html
29. Mas-Colell, A., Whinston, M. D., & Green, J. R. (1995). Microeconomic Theory: Oxford University Press New York.
30. Massell, B. F. (1969). Price Stabilization and Welfare. The Quarterly Journal of Economics, 83(2), 284-298. https://doi.org/10.2307/1883084
31. Mohaddes, K., & Pesaran, M. H. (2013). One Hundred Years of Oil Income and the Iranian Economy: A Curse or a Blessing? In Iran and the Global Economy: Routledge.
32. Newbery, D. M., & Stiglitz, J. E. (1979). The Theory of Commodity Price Stabilisation Rules: Welfare Impacts and Supply Responses. The Economic Journal, 89(356), 799-817. https://doi.org/10.2307/2231500
33. Oi, W. Y. (1961). The Desirability of Price Instability under Perfect Competition. Econometrica: Journal of the Econometric Society, 29(1), 58-64. https://doi.org/10.2307/1907687
34. Pindyck, R. S. (1990). Irreversibility, Uncertainty, and Investment: National Bureau of Economic Research Cambridge, Mass., USA.
35. Rodrik, D. (1993). The Positive Economics of Policy Reform. The American Economic Review, 83(2), 356-361.
36. Rotemberg, J. J., & Woodford, M. (1996). Imperfect Competition and the Effects of Energy Price Increases on Economic Activity. In: National Bureau of Economic Research Cambridge, Mass., USA.
37. Waugh, F. V. (1944). Does the Consumer Benefit From Price Instability? The Quarterly Journal of Economics, 58(4), 602-614. https://doi.org/10.2307/1884746

Rights and permissions
Creative Commons License This work is licensed under a Creative Commons Attribution 4.0 International License.

© 2024 CC BY-NC 4.0 | Planning and Budgeting

Designed & Developed by : Yektaweb