An Analysis of the Inflationary Effect of Subsidies Targeting Scheme of Iran: Flow-of-Funds Approach

Abstract

At the beginning of 2011, the Islamic Republic of Iran underwent a Scheme called “Subsidies Targeting". This scheme meant to replace subsidies on goods and services especially energy, which had kept prices low for decades, with a monthly refund to every resident as a compensation plan. Considering the magnitude of price change up to ten times and the important role of Energy carriers in production and households' consumption, it would be necessary to analyze the<br />inflationary effect of that Scheme. Therefore we developed a RMSM-X model including six sectors and added some behavioral links among economic variables to forecast Inflation and Growth rates for a four-year period. Unlike other studies done about this subject in Iran, RMSM-X ensures economic consistency among all sectors of an economy. The<br />RMSM-X projection results suggest that the Scheme increases the inflation rate by 24% and reduces the growth rate by 5%. Even though inflation rate levels of the year after running the Scheme but it will not fall back to the base scenario by 2015.<br /><br />