Implementation of Value-Added Tax on Iran Banking Services: An Application of DSGE Model

Ahmad Gholami () and Hossein Abasinejad ()
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Ahmad Gholami: Department of Economics, University of Tehran
Hossein Abasinejad: Department of Economics, University of Tehran

Journal of Money and Economy, 2016, vol. 11, issue 3, 283-303

Abstract: In the Value Added Tax (VAT) system some goods and services, such as banking services, are exempted from taxes. Based on theoretical foundations, exempt treatment leads to several distortions and inefficiencies in the economy. In order to understand the importance of exemption on macroeconomic fluctuations as well as the fundamental role of financial intermediaries in economy shocks, this study using a Dynamic Stochastic General Equilibrium (DSGE) model provides an empirical analysis for policy simulations with consideration of VAT on financial services under different scenarios. Accordingly, the values of model parameters was estimated via calibration method and also the model accuracy were evaluated by Brooks & Gelman test and impulse-response functions. Simulation results of the policy exercise suggest that shifting from exemption to full taxation, reduces the cost of bank, and increases the bank free resources leading to higher investment and output through more bank loans.

Keywords: VAT; Banking Services; Exempt Treatment; Dynamic Stochastic General Equilibrium (search for similar items in EconPapers)
JEL-codes: E52 E58 H20 H25 H30 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:mbr:jmonec:v:11:y:2016:i:3:p:283-303

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