The effect of fiscal stimulus on Iran's GDP: an application of the semi-closed input-output model

Document Type : Research Paper

Authors

1 PhD student in Economics, Mazandaran University, Babolsar, Iran.

2 Faculty of Economics and Administrative Sciences, Mazandaran University, Babolsar, Iran.

3 Associate professor, Faculty of Economics and Administrative Sciences, Mazandaran University, Babolsar, Iran

Abstract

Purpose: The importance of household expenses in creating demand for domestic products causes the factors affecting it to be considered in establishing financial incentives. The studies conducted so far have investigated the effect of financial stimulus on macroeconomic variables partly with closed input-output models. However, like Keynes' consumption theory, this model considers household consumption as a function of current income only. Since it overestimates the relationship between the household sector and the production sector, the results of this model are distorted due to the presence of exogenous consumption within the matrix of intermediate goods.
Methodology: To solve this problem, the current research uses a semi-closed input-output model with semi-endogenous consumption, which was first introduced by Chen et al. (2016). This model adapts the output to other theories of consumption. Also, due to the removal of false effects caused by the transfer of exogenous consumption to the final demand class, more realistic results are obtained from the government's fiscal stimulus. For this purpose, the present study compares the effects of fiscal stimulus on Iran's gross domestic product in two closed models and a semi-closed model using the input-output table issued by the Central Bank of Iran in 2015.
Findings and discussion: The results of this research show that, with a 10% increase in government spending as a financial stimulus, more value added has been created in the agriculture and horticulture sectors and the private residential unit sector. This is because these two sectors have a larger endogenous consumption coefficient than other sectors. It states that the larger or smaller endogenous consumption coefficient is of effect on the intensity of government investment or the increase in government spending affects the value added and the production level. Moreover, the value-added coefficients obtained from the semi-closed input-output model are smaller than those obtained from the closed input-output model, and they eliminate the distortion in the results of the closed model and increase the accuracy of the calculation results.
Conclusions and policy implications: To consider the relationship between the household sector and the production sector, a closed input-output model is usually used, but, due to not considering all the factors affecting household consumption, this model cannot calculate the results of policy making. It is because the model overestimates the difference between the household sector and the production sector. To solve this problem, a semi-closed input-output model with semi-endogenous consumption was introduced by Chen’s team. Their model considers all the factors affecting household consumption, hence used for Iranian data in the present study. In this model, due to the calculation of the coefficient of endogenous consumption, the key sectors are specified, and then, due to the elimination of false effects caused by the transfer of exogenous consumption to the final demand class, more realistic results are obtained from predicting the effect of policy on production or other macroeconomic variables.

Keywords

Main Subjects

References

Abunouri, E., Karimi Potanlar, S., & Mardani, M. (2004). The Effect of Financial Policy on Macroeconomic Variables of Iran's Economy: an Auto Regression Approach. Economic Research Journal, 10(38), 117-143. [In Persian].
Attahir, A. (2016). Dynamic Effects of Fiscal Policy on Output and Unemployment in Nigeria: An Econometric Investigation. CBN Journal of Applied Statistics, 7(2), 13-39.
Banui, A., & Mahmoudi, M. (2001). Quantitative Investigation of the Position of the Textile Industry in the National Economy and Calculation of its Potential Job Creation Power in the Form of a Quasi Matrix System of Social Accounting. Economic Research (Sustainable Growth and Development), 1(4), 5-46. [In Persian]
Baum, A., & B. Koester, G. (2011). The Impact of Fiscal Policy on Economic Activity over the Business Cycle Evidence from a Threshold VAR Analysis. Discussion Paper Series 1, Economic Studies, 21(3), 56-83.
Bayat, M., Afshari, Z., & Tavakolian, H. (2016). Monetary Policy and Total Stock Price Index in the Framework of a DSGE model. Quarterly Journal of Economic Research and Policy, 24(3), 171-206. [In Persian].
Branson, W. (2012). Macroeconomic Theory and Policies, Translated by Abbas Shakri, (Vol. 18). Forozesh Publications. [In Persian].
Chen, Q., Dietzenbacher, E., Los, B., &.Yang, C. (2016). Modeling the Short-Run Effect of Fiscal Stimuli on GDP: A New Semi-Closed Input– Output Model. Economic Modelling, 58(2), 52-63.
Cruz, L. (2002). Energy Environment Economy Interactions: An Input- Output Approach Applied to Portuguese Case. The 7th Biennial Conference of the International Society for Ecological Economics, 21-40.
Feldstein, M. (2009). Rethinking the Role of Fiscal Policy. American Economic Review, 4(99), 546-559.
Friedman, M. (1953). The Effects of Full-Employment Policy on Economic Stability: A Formal Analysis. In Essays on Positive Economics (Vol.4). Chicago. Chicago University Press.
Gaiha, R., Imai, K., Thapa, G., & Kang, W. (2010). Fiscal Stimulus, Agricultural Growth and Poverty in Asia and the Pacific. A New Perspective, Rome: International Fund for Agricultural Development (IFAD).
Gholami, E., & Hojabr Kiani, C. (2014). Investigating the Position of the Business Cycle in Iran and its Effect on the Efficiency of Financial and Investment Stimulus Programs. Scientific Research Quarterly of Investment Science, 3(12), 253-272. [In Persian].
Haghighat, J., & Muharram Jodi, N. (2016). The Impact of Government Expenditure Shock on the Growth of GDP in Iran: Approach (ARDL). Economic Modeling Scientific Quarterly, 10(36), 141-166. [In Persian].
Hall, R.E. (1978). Stochastic Implications of the Life Cycle Permanent Income Hypothesis: Theory and Evidence. J. Polit. Econ, 6(86), 971-987.
Hamilton, J.D. (1994). Time Series Analysis (Vol.3). Princeton University Press, New Jersey.
Harvey, A.C. (1987). Application of the Kalman Filter in Econometrics. In Bewley, T.F. (Ed.), Advances in Econometrics. Cambridge University Press, Cambridge, 4(13), 285–313.
Https://www.Amar.org.ir
Kaplan, G., & Violante, G. (2014). A Model of the Consumption Response to Fiscal Stimulus Payments. Econometrica, 82(4), 1199–1239.
Karkesh, H., Dadres Moghadam, A., & Norouzian, M. (2023). Investigating the Effects of Government Financial Policies on Iran's Economy: with the Method of Computable General Equilibrium Model. Scientific Research Quarterly of Quantitative Economics, 23(9), 20-38. [In Persian].
Khodaee, M., Jafari, M., & Fatahi, Sh. (2018). Investigating the Effects of Financial Policies on Economic Growth in Iran's Economy: State-Space Patterns. Economic Growth and Development Research Quarterly, 8(31), 72-92. [In Persian]
Madah, M., & Noiran, F. (2012). Estimating the Value of the Informal Economy in Iran Based on Environmental Variables, Kalman filter Approach. Economic Modeling Research Quarterly, 3(10),1-19. [In Persian].
Mankiw, N.G., (2010). Macroeconomics. (Vol. 7). Worth Publishers, New York.
May Li, S., & Spencer, A. (2014). Effectiveness of the Australian Fiscal Stimulus Package: A DSGE. Working Paper Series, 12(6), 21-35.
Miyazawa, K. (1976). Input –Output Analysis and the Structure of Income Distribution. Springer-Verlag Press, Berlin, 10(3), 44-79.
Nurheryanti, V., Notolegowo, H., Aisy, Sh., Rahmah, Sh., & Fathia, Y. (2021). Impact of Fiscal Stimulus on Economic Output and Labor Income in Indonesia. Dinamika Ekonomi. Jurnal Ekonomi dan Pembangunan, 4(1), 184-192.
Schroder, E., & Storm, S. (2020). Fiscal Policy in South Africa: Closed Input -Output Incom and Employment Multipliers. Institute for Economic Justice Research Note, 8(12), 14-28.
 Shafiee, A., Broumand, Sh., & Tashkini, A. (2006). The Test of Effec of Fiscal Policy on Economic Growth. Economic Research Journal, 6(23), 81-112. [In Persian].
Sharifi, N. (2010). The Effects of Indirect Taxes and Government Spending on Employment and Inflation: An Input-Output Analysis, Journal of Economic Research, 46(2), 59-78. [In Persian].
Van Rymenant, P. (2015). Fiscal Stimulus in Times of High Debt: An Empirical Model for the European Union. Master’s Thesis to Obtain the Degree of Master of Advanced Studies in Economics, University of KU Leuven, Belgium.
The Journal of Economic Policy
Volume 16, Issue 32
March 2025
Pages 37-67

Files

Share

How to cite

Statistics