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A Macroeconomic Analysis of Energy Subsidies in a Small Open Economy

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Listed author(s):
  • Gerhard Glomm
  • Jürgen Jung

Abstract

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 percent cut in energy subsidies are: (i) Steady state GDP drops in most of our experiments as less energy is used in production. (ii) Steady state consumption rises in most of our experiments. (iii) Welfare can rise by as much as 0.6 percent in consumption equivalent terms. (iv) 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.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2015/wp-cesifo-2015-02/cesifo1_wp5201.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 5201.

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Date of creation: 2015
Handle: RePEc:ces:ceswps:_5201
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Keywords: energy subsidies; fiscal policy reform; public sector reform; growth;

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Find related papers by 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

References listed on IDEAS
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  7. Pereira, Alfredo M. & Pereira, Rui M., 2014. "On the environmental, economic and budgetary impacts of fossil fuel prices: A dynamic general equilibrium analysis of the Portuguese case," Energy Economics, Elsevier, vol. 42(C), pages 248-261.
  8. William Easterly & Luis Servén, 2003. "The Limits of Stabilization : Infrastructure, Public Deficits, and Growth in Latin America," World Bank Publications, The World Bank, number 14456, October.
  9. Turnovsky, Stephen J., 2000. "Fiscal policy, elastic labor supply, and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 185-210, February.
  10. Rafael Portillo & Andrew Berg & Jan Gottschalk & Luis-Felipe Zanna, 2010. "The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios," IMF Working Papers 10/160, International Monetary Fund.
  11. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
  12. Glomm, Gerhard & Jung, Juergen & Tran, Chung, 2009. "Macroeconomic implications of early retirement in the public sector: The case of Brazil," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 777-797, April.
  13. Arze del Granado, Francisco Javier & Coady, David & Gillingham, Robert, 2012. "The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries," World Development, Elsevier, vol. 40(11), pages 2234-2248.
  14. Blankenau, William F. & Simpson, Nicole B., 2004. "Public education expenditures and growth," Journal of Development Economics, Elsevier, vol. 73(2), pages 583-605, April.
  15. Gerhard Glomm & Juergen Jung & Chung Tran, 2012. "Fiscal Austerity Measures: Spending Cuts vs. Tax Increases," ANU Working Papers in Economics and Econometrics 2012-594, Australian National University, College of Business and Economics, School of Economics.
  16. Plante, Michael, 2014. "The long-run macroeconomic impacts of fuel subsidies," Journal of Development Economics, Elsevier, vol. 107(C), pages 129-143.
  17. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  18. Holtz-Eakin, Douglas, 1994. "Public-Sector Capital and the Productivity Puzzle," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 12-21, February.
  19. Gerhard Glomm & B. Ravikumar, 1998. "Flat-Rate Taxes, Government Spending on Education, and Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 306-325, January.
  20. Christophe Hurlin & Florence Arestoff, 2010. "Are Public Investment Efficient in Creating Capital Stocks in Developing Countries?," Economics Bulletin, AccessEcon, vol. 30(4), pages 3177-3187.
  21. Lynde, Catherine & Richmond, J, 1993. "Public Capital and Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 401-414, May.
  22. Gupta, Sanjeev & Kangur, Alvar & Papageorgiou, Chris & Wane, Abdoul, 2014. "Efficiency-Adjusted Public Capital and Growth," World Development, Elsevier, vol. 57(C), pages 164-178.
  23. Gerhard Glomm & Juergen Jung & Changmin Lee & Chung Tran, 2009. "Public Sector Pension Policies and Capital Accumulation in Emerging Economies," Discussion Papers 2009-10, School of Economics, The University of New South Wales.
  24. Colucci, Domenico, 2003. "Steady states in the OLG model with seignorage and long-lived agents," Research in Economics, Elsevier, vol. 57(4), pages 371-381, December.
  25. Laitner, John, 1984. "Transition time paths for overlapping-generations models," Journal of Economic Dynamics and Control, Elsevier, vol. 7(2), pages 111-129, May.
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