Modeling Energy Price Liberalization in Iran Economy

Abstract

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.

Keywords

• energy price reforms
• energy subsidies
• subsidies reforms
• dynamic general equilibrium
• monetary policy
• household welfare