A Financial General Equilibrium Model for Assessment of Financial Sector Policies in Developing Countries

Haqiqi, Iman and Mirian, Narges (2015): A Financial General Equilibrium Model for Assessment of Financial Sector Policies in Developing Countries.

Abstract

This paper introduces a real-financial CGE (computable general equilibrium) model for economic policy analysis. It is a multi-investor, multi-asset, and multi-sector model appropriate for what-if policy analysis in a single-country open-economy framework. The financial side includes a central bank, commercial banks, deposits, loans, equities, bonds, and foreign currency. We also consider markets for loanable funds. The model assumes small open economy, imperfect capital mobility, imperfect Armington substitution between imported and domestic commodity, nested CES (constant elasticity of substitution) structure in production, nested CES structure in consumption, and heterogeneity of domestic products in one commodity category. We consider the transport margin, wholesale margin, import tariffs, import subsidy, production tax, value added tax, goods and services tax, and other transfer payments. We calibrate the model based on the 1999 Social Accounting Matrix of Iran. This matrix includes 47 production activities and 112 commodity categories detailed on hydrocarbon resources.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial general equilibrium; social accounting matrix; financial assets; portfolio optimization; FCGE; Economic Policy
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C67 - Input-Output Models; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C68 - Computable General Equilibrium Models; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models; D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy

References

Atkinson, G., & Hamilton, K. (2003). Savings, growth and the resource curse hypothesis. World Development, 31(11), 1793-1807.

Auty, R. (1994). Industrial Policy Reform in Six Large Newly Industrializing Countries: The Resource Curse Thesis. World Development, 22, 11-26.

AydIn, L., & Acar, M. (2011). Economic impact of oil price shocks on the Turkish economy in the coming decades: A dynamic CGE analysis, Energy Policy, 39(3), pages 1722-1731, March.

Bahador, A., & Haqiqi, I. (2015). Economic Effects of Petroleum Export Reduction in Iran: Financial Computable General Equilibrium Approach. Quarterly Journal of Monetary and Banking Researches, 8(24), 251–284.

Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy 98(S5): 103-125.

Bergman, L. (1988). Energy Policy Modeling: A survey of general equilibrium approaches, Journal of Policy Modeling, 10(3), pages 377-399.

Bourguignon, F., Branson, W. H., & De Melo, J. (1992). Adjustment and income distribution: A micro-macro model for counterfactual analysis. Journal of Development Economics, 38(1), 17-39.

Central Bank of Iran (2013). Economic Trends No 75. Central Bank of Iran.

Corden, M. (1984). Booming Sector and Dutch Disease Economics: Survey and Consolidation. Oxford Economic Papers, 36, (3), 359-380.

Corden, W. M., & Neary, J. P. (1982). Booming sector and de-industrialisation in a small open economy. The economic journal, 825-848.

Dasgupta, P., & Heal, G. (1974). The optimal depletion of exhaustible resources. The review of economic studies, 3-28.

De Melo, J.(1988). Computable general equilibrium models for trade policy analysis in developing countries: A survey, Journal of Policy Modeling, 10(4), pages 469-503.

Dixon, P. B., Giesecke, J. A., & Rimmer, M. T. (2015). Superannuation within a financial CGE model of the Australian economy (No. g-253). Victoria University, Centre of Policy Studies/IMPACT Centre.

Fardmanesh, M. (1991). Dutch disease economics and oil syndrome: An empirical study. World Development, 19(6), 711-717.

Feltenstein, A. (1986). An intertemporal general equilibrium analysis of financial crowding out: A policy model and an application to Australia, Journal of Public Economics, 31(1), pages 79-104, October.

Gary, I., & Karl, T. L. (2003). Bottom of the Barrel. Africa’s Oil Boom and the Poor. Catholic Relief Services.

Gelb, A (1988). Oil Windfall: Blessing or Curse. Oxford University Press: New York.

Gylfason, T. (2001), Nature, Power and Growth. Scottish Journal of Political Economy, 48: 558–588.

Haqiqi, I., & Bahador, A. (2015). Investigating Economic Effects of Oil Export Reduction: A Financial Computable General Equilibrium Approach, MPRA Paper 95784, University Library of Munich, Germany.

Haqiqi, I., & Bahaloo Horeh, M. (2013). Impacts of Cut in Oil Exports on Sectoral Employment of Skilled and Unskilled Labor: A CGE Approach International Iranian Economic Association Conference, IIEA, 2013, Istanbul, Turkey.

Haqiqi, I., & Bahaloo Horeh, M. (2014a). A CGE Model for Labor Migration Analysis Using Labor Micro Consistent Matrix, 22nd International Input-Output Conference & 4th Edition of the International School of I-O Analysis,14-18 July 2014, Lisbon, Portugal.

Haqiqi, I., & Bahaloo Horeh, M. (2014b). Dynamic CGE Modeling of Interest Rate Subsidies: An Application of Financial SAM, EcoMod2014, International Conference on Economic Modeling, Bali, Indonesia, July 16-18, 2014.

Haqiqi, I., & Bahalou Horeh, M. (2013). Macroeconomic Impacts of Export Barriers in a Dynamic CGE Model. Journal of Money and Economy, 8(3), 117–150.

Haqiqi, I., & Bahalou Horeh, M. (2015). A General Equilibrium Analysis of Unskilled Labor Entry and Skilled Labor Exit in Iran. The Economic Research, 15(3), 67–89.

Haqiqi, I., & Mortazavi Kakhaki, M. (2012). The Impact of Redistribution of Opportunities on Income Inequality: A CGE Approach. Journal of Economic Modeling Research, 2(7): 51-73.

Haqiqi, I., Aqanazari, H., & Sharzei, G. A. (2013). Natural Resources Revenue Allocation: A Dynamic General Equilibrium Approach. Journal of Economic Modeling Research, 3(11), 49–76.

Haqiqi, I., Bahaloo Horeh, M. & Ghaedi, M. (2014). A CGE Analysis of Welfare and Sectoral Impacts of Removing Interest Rate Subsidies: A Model Based on Financial SAM and Flow of Fund Accounts, 22nd International Input-Output Conference & 4th Edition of the International School of I-O Analysis, 14-18 July 2014, Lisbon, Portugal.

Haqiqi, I., Manzoor, D., & Aghababaei, M. E. (2013). Sectoral Economic Impacts of Electricity Efficiency Improvements: A Computable General Equilibrium Approach. Journal of Planning and Budgeting, 17(4), 25–44.

Haqiqi, I., Shahi, Z., & Ismaili, M. (2017). Impact of Cash Subsidy Transfer in a Nonlinear Programming Model for Economic Input-Output Analysis, MPRA Paper 95783, University Library of Munich, Germany.

Hartwick, J. M. (1977). Intergenerational equity and the investing of rents from exhaustible resources. The American economic review, 972-974.

Hotelling, H. (1931). The economics of exhaustible resources. The journal of political economy, 137-175.

Kolstad, I., & Wiig, A. (2009). It's the rents, stupid! The political economy of the resource curse. Energy Policy, 37(12), 5317-5325.

Krugman, Paul, (1987). The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher: Notes on trade in the presence of dynamic scale economies, Journal of Development Economics, 27(1-2), pages 41-55, October.

Larsen, E. R. (2005). Are rich countries immune to the resource curse? Evidence from Norway's management of its oil riches. Resources Policy,30(2), 75-86.

Leite, C. A., & Weidmann, J. (1999). Does Mother Nature corrupt? Natural resources, corruption, and economic growth. Natural Resources, Corruption, and Economic Growth (June 1999). IMF Working Paper, (99/85).

Lewis J. D. (1992). Financial repression and liberalization in a General Equilibrium model with financial markets. Journal of Policy Modeling, 14(2):135–166, 1992.

Light, Paul C. (1999). The True Size of Government. Brookings Institution Press.

Manzoor, D., & Bahaloo Horeh, M. (2015). Analyzing the Impact of Increasing Minimum Wage on Skilled and Unskilled Labor in Iran: A CGE Approach. Journal of Quantitative Economics, Volume 12, 3 (46).

Manzoor, D., & Haqiqi, I. (2012). Impact of Energy Price Reform on Environmental Emissions; A Computable General Equilibrium Approach. Journal of Environmental Studies, 37(60): 1-12.

Manzoor, D., & Haqiqi, I. (2013). Impacts of Energy Price Increase and Cash Subsidy Payments on Energy Demand. Journal of Trade Studies, 67(17), 101–124.

Manzoor, D., Aghababaei, M. E., & Haqiqi, I. (2011). Rebound Effects Analysis of Electricity Efficiency Improvements in Iran: A Computable General Equilibrium Approach. Quarterly Energy Economics Review, 8(28), 1–23.

Manzoor, D., Haqiqi, I., & Aghababaei, M. E. (2012). Decomposing Electricity Demand Elasticity in Iran: Computable General Equilibrium Approach. Biquarterly Journal of Economic Policy, 4(8), 91-112.

Manzoor, D., Haqiqi, I., & Aghababaei, M. E. (2012). Modeling Dutch Disease in the Economy of Iran: A Computable General Equilibrium Approach. Quarterly Energy Economics Review, 8(31): 59-84.

Manzoor, D., Haqiqi, I., & Aghababaei, M. E. (2013). Economic Impacts of Investment in the Electricity Industry: A CGE Comparison of Regulated and Free Markets. Quarterly Energy Economics Review, 9(35), 47–74.

Manzoor, D., Shahmoradi, A., & Haqiqi, I. (2010). An Assessment of the Impact of Reducing Implicit and Explicit Energy Subsidies in Iran; Using a Computable General Equilibrium Model Based on a Modified Micro Consistent Matrix. Quarterly Energy Economics Review, 7(26): 21-54.

Manzoor, D., Shahmoradi, A., & Haqiqi, I. (2012). An Analysis of Energy Price Reform: A CGE Approach. OPEC Energy Review, 36(1), 35–54. DOI: 10.1111/j.1753-0237.2011.00200.x

Manzoor, D., & Haqiqi, I. (2013). Impacts of Energy Price Increase and Cash Subsidy Payments on Energy Demand, MPRA Paper 95826, University Library of Munich, Germany.

Mikesell, R. F. (1997). Explaining the resource curse, with special reference to mineral-exporting countries. Resources Policy, 23(4), 191-199.

Mortazavi Kakhaki, M., Haqiqi, I. & Mahdavi Adeli, M. (2013). Regional Equality of Opportunities and Income: A General Equilibrium Modeling for Iran , MPRA Paper 95822, University Library of Munich, Germany.

Mortazavi Kakhaki, M., Haqiqi, I., & Mahdavi Adeli, M. H. (2013). Regional General Equilibrium Analysis on Impacts of Inequalities of Opportunities on Income Distribution. Journal of Regional Economics and Development, 5(20), 69–95.

Naastepad, C. (2003). Restoring Macroeconomic Stability through Fiscal Adjustment: A Real-Financial CGE Analysis for India. Review of Development Economics, 7, pp. 445-461

Ngandu, Stewart, (2008). Exchange Rates and Employment, South African Journal of Economics, 76(s2), pages S205-S221, 08.

Peng, Xiujian, (2008). Demographic Shift, Population Ageing and Economic Growth in China: A Computable General Equilibrium Analysis, Pacific Economic Review, 13(5), pages 680-697.

Pereira, Alfredo M. & Shoven, John B., (1988). Survey of dynamic computational general equilibrium models for tax policy evaluation, Journal of Policy Modeling, 10(3), pages 401-436.

Ram Rati (1986). Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time-Series Data. The American Economic Review. 76, No. 1 (Mar., 1986), pp. 191-203.

Robinson, J. A., & Torvik, R. (2005). White elephants. Journal of Public Economics, 89(2), 197-210.

Robinson, J. A., Torvik, R., & Verdier, T. (2006). Political foundations of the resource curse. Journal of development Economics, 79(2), 447-468.

Robinson, J. A., Torvik, R., & Verdier, T. (2014). Political foundations of the resource curse: A simplification and a comment. Journal of Development Economics, 106, 194-198.

Rutherford, T. F. (1999). Applied general equilibrium modeling with MPSGE as a GAMS subsystem: An overview of the modeling framework and syntax. Computational Economics, 14(1-2), 1-46.

Sachs, J. & Warner, A. (2001). The Curse of Natural Resources. European Economic Review, 45, (4-6), 827-838.

Sachs, J.D. & Warner, A. (1995). Natural resources Abundance and Economic growth, NBER Working Paper, No. 5398.

Shahmoradi, A., Haqiqi, I., & Zahedi, R. (2011). Impact Analysis of Energy Price Reform and Cash Subsidy Payment in Iran: A CGE Approach. Quarterly Journal of Economic Research and Policy, 19(57): 5-30.

Sharifi, A., Khoshakhlagh, R., Bahaloo Horeh, M., & Sadeghi Hamedani, A. (2014). The Impact of Energy Price Increase on Employment: A CGE Approach. Journal of Economic Modeling Research, 4(16), 153-180. (In Persian).

Shoven, John and John Whalley (1984). Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey. Journal of Economic Literature, 22(3) 1007-51

Solow, R. M. (1974). Intergenerational equity and exhaustible resources. The review of economic studies, 29-45.

Stevens, P., & Dietsche, E. (2008). Resource curse: An analysis of causes, experiences and possible ways forward. Energy Policy, 36(1), 56-65.

Stiglitz, J. (1974). Growth with exhaustible natural resources: efficient and optimal growth paths. The review of economic studies, 123-137.

Taylor, L. (1981). IS/LM in the Tropics: Diagrammatics of the New Structuralist Macro Critique. In Economic Stabilization in Developing Countries, edited by W. R. Cline and S. Weintraub. Washington D.C.: The Brookings Institution.

Ulussever, Talat. (2009). Macroeconomic Effects of Interest Rate Liberalization: The Case of Turkey. In: 1st International Symposium on Sustainable Development, June 9-10, 2009, Sarajevo, Bosnia and Herzegovina.

World Bank (1997). Gabon: Poverty in a Rent-Based Economy. Report No. 16333-CA, Human Development Group, Washington DC, 1997.

Xiao, Jingliang & Wittwer, Glyn. (2009). Will an Appreciation of the Renminbi Rebalance the Global Economy? A Dynamic Financial CGE Analysis, Centre of Policy Studies/IMPACT Centre Working Papers g-192, Monash University, Centre of Policy Studies/IMPACT Centre.

Yeldan, E. (1997). Financial Liberalization and Fiscal Repression in Turkey: Policy Analysis in a CGE Model with Financial Markets. Journal of Policy Modeling 19 (1):79-117.

Other Related References:

Haqiqi, I., & Bahalou, M. (2015). A General Equilibrium Analysis of Unskilled Labor Entry and Skilled Labor Exit in Iran, MPRA Paper 95781, University Library of Munich, Germany.

Haqiqi, I., & Manzoor, D. (2012). Environmental Impacts of Phasing out Energy Subsidies, MPRA Paper 95688, University Library of Munich, Germany, revised 2016.

Haqiqi, I., & Mortazavi Kakhaki, M. (2012). The Impact of Redistribution of Opportunities on Income Inequality: A CGE Approach, MPRA Paper 95819, University Library of Munich, Germany.

Haqiqi, I., Aghanazari, H., & Sharzei, G. (2013). Natural Resources Revenue Allocation: A Dynamic General Equilibrium Approach, MPRA Paper 95785, University Library of Munich, Germany.

Haqiqi, I., Manzoor, D., & Aghababaei, M. (2013). Impacts of Electricity Efficiency Improvements on Factors Market: A Computable General Equilibrium Approach, MPRA Paper 95825, University Library of Munich, Germany.

Manzoor, D., & Haqiqi, I. (2012). Impact of Energy Price Reform on Environmental Emissions; A Computable General Equilibrium Approach, MPRA Paper 95818, University Library of Munich, Germany.

Manzoor, D., Aghababaei, M., & Haqiqi, I. (2011). Rebound Effects Analysis of Electricity Efficiency Improvements in Iran: A Computable General Equilibrium Approach, MPRA Paper 95810, University Library of Munich, Germany.

Manzoor, D., Haqiqi, I. & Aghababaei, M. (2012). Decomposing Electricity Demand Elasticity in Iran: Computable General Equilibrium Approach, MPRA Paper 95817, University Library of Munich, Germany.

Manzoor, D., Haqiqi, I., & Aghababaei, M. (2013). Economic Impacts of Investment in the Electricity Industry: A CGE Comparison of Regulated and Free Markets, MPRA Paper 95823, University Library of Munich, Germany.

Manzoor, D., Haqiqi, I., & Aghababaei, M. (2012). Modeling Dutch Disease in the Economy of Iran: A Computable General Equilibrium Approach, MPRA Paper 95821, University Library of Munich, Germany.

Manzoor, D., Shahmoradi, A., & Haqiqi, I. (2010). An Assessment of the Impact of Reducing Implicit and Explicit Energy Subsidies in Iran; Using a Computable General Equilibrium Model Based on a Modified Micro Consistent Matrix, MPRA Paper 95808, University Library of Munich, Germany.

Shahmoradi, A., Haqiqi, I., & Zahedi, R. (2011). Impact Analysis of Energy Price Reform and Cash Subsidy Payment in Iran: A CGE Approach, MPRA Paper 95809, University Library of Munich, Germany.