Modeling Dutch Disease in the Economy of Iran: A Computable General Equilibrium Approach

In this paper, we will study the impacts of a counterfactual scenario of an increase in oil revenues on the price levels, activity levels, imports and exports in Iran. Our focus is on non-traded sectors, household welfare, and expenditure indices in the framework of a Computable General Equilibrium (CGE) model. The model is calibrated based on the 2001 Micro Consistent Matrix assuming Iran as a small open economy. The model consists of 11 production sectors, urban households, rural households, government, capital formation, exports, and imports. We concentrate on non-traded products especially rental services, public services, and construction sectors. Since part of the outputs of the construction sector relates to the capital value of buildings, we divided the demand for the construction sector into consumption and investment (seeking capital gain) purposes. In this study, we simulate the impact of a 30% increase in annual oil revenues. Based on the results, this shock leads to an increase in activity levels in the nontraded sectors and a decline in the traded sectors activity levels. Services and manufacturing show the highest increases in import levels at respectively 24% and 22%. Except for the oil and gas sector, all productive sectors experience declining exports. Public services, water, and construction sectors register the highest price increases. Results are robust to production elasticity of substitution choice, while they are sensitive to the elasticity of substitution between imports and domestic output.