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A Macroeconomic Analysis Of Energy Subsidies In A Small Open Economy

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  • Gerhard Glomm
  • Juergen Jung

Abstract

type="main" xml:id="ecin12221-abs-0001"> We construct a dynamic model of a small open economy to analyze the effects of large energy subsidies. The model includes domestic energy production and consumption, trade in energy at world market prices, as well as private and public sector production. The model is calibrated to Egypt and used to study reforms such as reductions in energy subsidies with corresponding reductions in various tax instruments or increases in infrastructure investment. We calculate the new steady states, transition paths to the new steady state, and the size of the associated welfare losses or gains. Our main results for a 15% cut in energy subsidies are: (1) Steady state gross domestic product drops in most of our experiments as less energy is used in production. (2) Steady state consumption rises in most of our experiments. (3) Welfare can rise by as much as 0.6% in consumption equivalent terms. (4) The largest gains in terms of output and of welfare can be obtained when savings from energy subsidy cuts are used to fund additional infrastructure investment. ( JEL E21, E63, H55, J26, J45)

Suggested Citation

  • Gerhard Glomm & Juergen Jung, 2015. "A Macroeconomic Analysis Of Energy Subsidies In A Small Open Economy," Economic Inquiry, Western Economic Association International, vol. 53(4), pages 1783-1806, October.
  • Handle: RePEc:bla:ecinqu:v:53:y:2015:i:4:p:1783-1806
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

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