Macro-Economic Impacts of Lowering Interest Rate: A Real-Financial CGE Evaluation for Iran
Fall 2011, Volume 6 - Number 1 (28 صفحه - از 107 تا 134)
In Iran, interest rate is regulated by government by setting a ceiling for the credits allocated to various economic sectors. In recent years, the old theory of financial repression in the form of reducing interest rate of credits has been considered as a necessity to stimulate and encourage investment and economic sectors expansion in Iran. This study investigates the effects of this policy on the growth of investment and production and other macro-economic variables in the context of the economy of Iran. To this end, we modified and extended the ORANI-G CGE model to appropriately present Economy of Iran and to include financial sector. This real- financial CGE model constitutes of 46 sectors producing 60 commodities and services. Then, we used this model to simulate a 4 percent reduction in interest rate of credits in all economic sectors. Results revealed that, following this policy the real GDP and total fixed capital formation will face a growth rate of 1.2 and 1.86 percent, respectively. Employment rises by 0.71 percent and overall export experiences 2.84% growth rate which leads to the 0.1% improvement of balance of trade. Following a reduction in interest rateof credits, the prices of commodities and services decline which result inreduction of inflation rate by 0.53 percent. In addition, households income and savings (urban and rural) increase by 0.54 and 7.83 percent, respectively. Consequently, it seems in the context of the Economy of Iran, the policy of financial repression causes positive impacts on the importance of macro-economic variables.خلاصه ماشینی:
"In recent years, the old theory of financial repression in the form of reducing interest rate of credits has been considered as a necessity to stimulate and encourage investment and economic sectors expansion in Iran. Interest rate, growth, CGE evaluation Introduction In the absence of an advanced capital market in Iran, banks are the dominant domestic financial institutions and play a crucial role in financing investment projects and capital accumulation in the economy. In a different study, Vongpradhip (1989) indicated the positive impacts of low agricultural loan rates in Thailand in the form of increased real GDP, households’ income, agricultural employment and improved trade deficit. The developed real- financial CGE model for Iran, was used to simulate a shock of reducing interest rate of credits in the economic sectors and the impacts of implementing this policy on the economy of Iran was analyzed by tracing the effects of financial repression on macro- economic variables including investment and production, national accounts, prices and wage, employment and financial variables. In present RFCGE model, banks play the role of linking real side to the financial side of the economy by setting interest rate for credits and deposits, collecting savings of economic agents in the real side as bank deposits, and supplying credit to the private producers for financing investment and working capital. Based on this table, the financial repression policy, in terms of interest rate reduction, results in an increase in: overall employment, income of households, (both urban and rural), fixed capital formation, and a reduction in CPI."
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