Investigating Economic Effect of Oil Export Reduction in Iran: Financial Computable General Equilibrium Approach

In this paper, using a static Financial Computable General Equilibrium (FCGE) model we investigate the effects of oil export decline on GDP, private consumption, investment, government expenditure and production of different sectors in Iran's economy. We consider zero profit conditions, market clearance, income balances, flexibility of government expenditures, imperfect mobility of labor across sectors, imperfect substitution of domestic and foreign goods, firms and households maximization based on CES functional forms. We calibrate our model based on Iran's Social Accounting Matrix (SAM) provided by central bank, which presents economic transactions data of 47 activities, 112 goods and services, 7 financial assets and 5 institutions. Our simulations shows that 50 percent reduction in oil export results 6.22, 4.9 and 13.63 percent reduction respectively in the level of GDP, private consumption and government expenditure, while in this scenario non-oil export shows 18.49 percent expansion. We also provide sensitivity analysis to support our findings.