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Assessing Alternative Investment Policies in a Resource-Rich Capital-Scarce Country: Results from a DSGE analysis for Iran

Mohammad Sayadi and Musa Khoshkalam Khosroshahi

Energy Policy, 2020, vol. 146, issue C

Abstract: This study mainly aims to assess the impact of an oil revenue shock on Iran's macroeconomic variables using a New Keynesian DSGE model as well as considering some main resource-rich developing countries characteristics such as capital scarcity, government's dominance in the economy, and public investment inefficiencies features. Here, the macroeconomic outcomes of implementing an alternative fiscal rule, namely, modified Bird-in-Hand (MBIH), in which both the development of infrastructures and future generations needs are taken into account are investigated and compared with the fiscal rule of the base scenario. The results are considered in four directions: First, an oil revenue increase shock causes the macroeconomic variables to rise in both scenarios, but the variables private-sector production, consumption, total investment, and non-oil GDP have a more increase under the MBIH scenario. Second, oil revenue accumulation in the oil fund under the MBIH scenario is significantly more than that in the base scenario. Third, government budget deficit experiences a higher increase, and public sector production experiences a less rise under the MBIH scenario. Fourth, the sensitivity analysis of public investment inefficiency shows that this factor acts as a serious barrier to the realization of the government's investment goals. Therefore, performing the first-best (MBIH) fiscal rule entails the reduction of the government's budget dependency on oil revenues through expanding the tax base, improving the public investment efficiency, and shrinking the public sector.

Keywords: Oil revenue; Investment inefficiency; Fiscal rule; DSGE Model; Non-oil GDP; Resource-rich country (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.enpol.2020.111813

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Handle: RePEc:eee:enepol:v:146:y:2020:i:c:s0301421520305310