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Effect of Oil Sanctions on the Macroeconomic and Household Welfare in Iran: New Evidence from a CGE Model

Author

Listed:
  • Mohammad Reza Farzanegan

    () (University of Marburg)

  • Mohammad Mohammadikhabbazan

    () (Tarbiat Moddaress University)

  • Hossein Sadeghi

    () (Tarbiat Moddaress University)

Abstract

We examine the macroeconomic and household welfare consequences of oil sanctions in Iran. We use social accounting matrix (SAM) and develop a computable general equilibrium (CGE) model to simulate selected scenarios in which the exportation of oil from Iran to the rest of the world is banned. Our main results show that higher income households are losing more significantly under oil sanctions. Total imports, exports, private consumption, and GDP fall in response to oil sanctions. Interesting is the increase of net indirect taxes at the time of oil revenues fall. Real exchange rate appreciates in the oil sanction crisis. In addition, labor income increases while the capital income falls in response to oil sanctions in Iran. These simulations are in line with reality of the Iranian economy in post-oil sanction period.

Suggested Citation

  • Mohammad Reza Farzanegan & Mohammad Mohammadikhabbazan & Hossein Sadeghi, 2015. "Effect of Oil Sanctions on the Macroeconomic and Household Welfare in Iran: New Evidence from a CGE Model," MAGKS Papers on Economics 201507, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201507
    as

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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2015/07-2015_farzanegan.pdf
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    References listed on IDEAS

    as
    1. Mohammad Reza Farzanegan, 2014. "Military Spending and Economic Growth: The Case of Iran," Defence and Peace Economics, Taylor & Francis Journals, vol. 25(3), pages 247-269, June.
    2. Farzanegan, Mohammad Reza & Raeisian Parvari, Mozhgan, 2014. "Iranian-Oil-Free Zone and international oil prices," Energy Economics, Elsevier, vol. 45(C), pages 364-372.
    3. Sajjad F. Dizaji & Mohammad Reza Farzanegan & Alireza Naghavi, 2016. "Political institutions and government spending behavior: theory and evidence from Iran," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(3), pages 522-549, June.
    4. George Philippidis & Lionel Hubbard, 2005. "A Dynamic Computable General Equilibrium Treatment of the Ban on UK Beef Exports: A Note," Journal of Agricultural Economics, Wiley Blackwell, vol. 56(2), pages 307-312.
    5. repec:wsi:medjxx:v:03:y:2011:i:01:n:s1793812011000326 is not listed on IDEAS
    6. Jesper Jensen & David Tarr, 2014. "Trade, Exchange Rate, and Energy Pricing Reform in Iran: Potentially Large Efficiency Effects and Gains to the Poor," World Scientific Book Chapters,in: APPLIED TRADE POLICY MODELING IN 16 COUNTRIES Insights and Impacts from World Bank CGE Based Projects, chapter 13, pages 307-326 World Scientific Publishing Co. Pte. Ltd..
    7. Akbar E. Torbat, 2005. "Impacts of the US Trade and Financial Sanctions on Iran," The World Economy, Wiley Blackwell, vol. 28(3), pages 407-434, March.
    8. Naghavi, Alireza & Pignataro, Giuseppe, 2015. "Theocracy and resilience against economic sanctions," Journal of Economic Behavior & Organization, Elsevier, vol. 111(C), pages 1-12.
    9. Bahmani-Oskooee, Mohsen, 1996. "The black market exchange rate and demand for money in Iran," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 171-176.
    10. Maxim Engers & Jonathan Eaton, 1999. "Sanctions: Some Simple Analytics," American Economic Review, American Economic Association, vol. 89(2), pages 409-414, May.
    11. Farzanegan, Mohammad Reza & Markwardt, Gunther, 2009. "The effects of oil price shocks on the Iranian economy," Energy Economics, Elsevier, vol. 31(1), pages 134-151, January.
    12. Thomas F. Rutherford & E. Elisabet Rutstrom & David Tarr, 2014. "Morocco's free trade agreement with the EU: A quantitative assessment," World Scientific Book Chapters,in: APPLIED TRADE POLICY MODELING IN 16 COUNTRIES Insights and Impacts from World Bank CGE Based Projects, chapter 17, pages 405-437 World Scientific Publishing Co. Pte. Ltd..
    13. Pyatt, Graham, 1988. "A SAM approach to modeling," Journal of Policy Modeling, Elsevier, vol. 10(3), pages 327-352.
    14. Farzanegan, Mohammad Reza, 2009. "Illegal trade in the Iranian economy: Evidence from a structural model," European Journal of Political Economy, Elsevier, vol. 25(4), pages 489-507, December.
    15. Sajjad Faraji Dizaji & Peter A G van Bergeijk, 2013. "Potential early phase success and ultimate failure of economic sanctions," Journal of Peace Research, Peace Research Institute Oslo, vol. 50(6), pages 721-736, November.
    16. Gary Clyde Hufbauer & Jeffrey J. Schott & Kimberly Ann Elliott, 2007. "Economic Sanctions Reconsidered, 3rd edition (hardcover)," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4075, January.
    17. Robinson, Sherman & Roland-Holst, David W., 1988. "Macroeconomic structure and computable general equilibrium models," Journal of Policy Modeling, Elsevier, vol. 10(3), pages 353-375.
    18. AlShehabi, Omar Hesham, 2013. "Modelling energy and labour linkages: A CGE approach with an application to Iran," Economic Modelling, Elsevier, vol. 35(C), pages 88-98.
    19. Farzanegan, Mohammad Reza, 2011. "Oil revenue shocks and government spending behavior in Iran," Energy Economics, Elsevier, vol. 33(6), pages 1055-1069.
    20. Alex F. McCalla & John Nash, 2007. "Reforming Agricultural Trade for Developing Countries : Volume 1. Key Issues for a Pro-Development Outcome of the Doha Round," World Bank Publications, The World Bank, number 13519, July.
    21. L. J. Hubbard & G. Philippidis, 2001. "General Equilibrium and the Ban on British Beef Exports," Journal of Agricultural Economics, Wiley Blackwell, vol. 52(3), pages 87-95.
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    Cited by:

    1. M. Reza Gharibnavaz & Robert Waschik, 2015. "A Computable General Equilibrium Model of International Sanctions," Centre of Policy Studies/IMPACT Centre Working Papers g-255, Victoria University, Centre of Policy Studies/IMPACT Centre.

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    Keywords

    oil; sanctions; CGE model; social accounting matrix; Iran;

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