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- Type of Document: M.Sc. Thesis
- Language: English
- Document No: 42753 (54)
- University: Sharif University of Technology, International Campus, Kish Island
- Advisor(s): Moayedi, Vafa
- Abstract:
- After years of disputes on one of the most important challenges in our national economy, finally in Dey 1388 (January 5, 2010) the “Targeted Subsidies Law” was passed by the Iranian parliament. Based on this law, all fiscal (explicit) and quasi-fiscal (implicit) subsidies for goods and services will be removed from the government’s general budget and redistributed among public with a different system. Implementation of the Targeted Subsidies Plan legislation as one of the important decisions in Iran’s economy has widely gotten the attention of economists, scientists and policymakers at industries, universities and other governmental sectors. Firms and other economic actors such as producers and manufacturers are trying to understand the different dimensions of this plan accurately and forecast the effects of it correctly. In this regard, one of the key indicators of economic performance that is comprehensible for many role-players in the economy is inflation rate. Analyzing the inflation rate in the short run and in the long run is critical for proper execution of this plan. The term “inflation” originally meant an increase in the amount of money in circulation, which has some major outcomes at macroeconomic level. (Macroeconomics, 1995) We Use this original term for our assessment of Iranian economic development plan. The implementation of the “Targeted Subsidies Plan” has significant effects on both funding and expenditure of government’s general budget. It has significant effects on budget surplus or budget deficit and consequently on inflation rate. The problem originates from new funding sources for the government as a result of promoting real prices of energy. Although this plan is to remove subsidies in order to decrease deficit spending in the long run, the budget deficit we assess is the short run. Through step-by-step removing subsidies and redistributing money in the presence of current budget deficit in the short run, there is a great chance for sever budget deficit in the future. The government is not planning to pay more subsidies to the public, however redistribution system can cause more deficits. The importance of this issue arises from the unpredicted but possible budget deficit which can cause higher inflation. There are 4 sources of inflation after the implementation of the Targeted Subsidies Plan: a) Basic or rudimentary inflation in economy. b) The gross inflation from higher prices of energy. c) The expected inflation before the implementation of the plan. d) The inflation due to budget deficit after the implementation of the plan. The latter can be the continuous cause of inflation in our economy. Since to cover this deficit, the government requires expansive monetary policy. Expansive monetary policy increases government expenses and causes permanent government budget deficit in the future. Consequently, the possibility of inflationary cycles as constant causes for chronic inflation is not far beyond reality. In this thesis we introduce a regression model to estimate the coefficient of the key variables that have relationship with the inflation rate in the short run and in the long run. We use some variables such as real GDP, nominal money supply (M2), nominal effective exchange rate and nominal rate of return. Beside these, four key variables in our estimation are the budget deficit, the inflationary expectation, the price of oil and the price of imported goods. After reviewing the theoretical background, we decided to choose Johansen Approach for the long run and the Error Correction Model (ECM) for the short run estimation. Our analysis is based on time series annual data from year 1352 to year 1386 Shamsi Calendar (equivalent to 1974 to 2007) and the results show that budget deficit plays a major role for this estimation
- Keywords:
- Error Correction ; Exchange Rate ; Inflation Rate ; Budget Deficit ; Inflationary Expectation
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