Investigating the Impact of Exchange Rate Variation and the Oil Price Shocks on Household Welfare: CGE Model Approach

Document Type : Research Paper

Authors

1 Department of Economics, University of Kurdistan, Sanandaj, Iran,

2 Department of Economics and Management, Université d'Orléans, Orl´eans, France.

Abstract

The exchange rate and international oil price are key variables to cause the effects of external shock on economics and the relationship to domestic economy. Since in countries like Iran, most government revenues come from exchange earnings from the international markets by oil exports, the impact of these two variables on the economy has significant consequences. In addition, it should be considered how fluctuations in the exchange rate and international oil prices can impact policy and international relations. According to the international trade perspective, it is believed that the exchange rate affects the economy through the changes in exports and imports commodities; therefore, expectations of the exchange rate will affect the price of the products traded. Moreover, the impact of oil price on the production of commodities changes the level of supply for activities and income of institutions through changes in the production factors and intermediary imports price. We conclude that if any change in both exchange rate and oil prices occurs, it will cause a change in welfare indicators. This research has therefore arisen to fill this void in the literature. Moreover, it utilizes a logistic model to represent the change in the exchange rate and oil price. Based on empirical results, a recursive computable general equilibrium model is constructed to predict future social welfare and simulate the impact of exchange rate fluctuations along with the oil price shock. The results are presented in different scenarios using the 2011 Social Accounting Matrix (SAM).

Keywords

Main Subjects

References

Adelman, I., & Robinson, S. (1986). US agriculture in a general equilibrium
framework: Analysis with a social accounting matrix. American Journal of
Agricultural Economics, 68(5), 1196-1207.
Armington, P. S. (1969). A theory of demand for products distinguished by place
of production. Staff Papers, 16(1), 159-178.
Aydın, L., & Acar, M. (2011). Economic impact of oil price shocks on the Turkish
economy in the coming decades: A dynamic CGE analysis. Energy Policy,
39(3), 1722-1731.
Ayisi, R. K. (2020). The asymmetry effect of oil price changes on inflation, and
the welfare implication for Ghana. African Journal of Economic and
Management Studies.
Baez, J. E., Caruso, G., & Pullabhotla, H. (2018). Who wins and who loses from
staple food price spikes? Welfare implications for mozambique. The World
Bank.
Bakas, D., & Triantafyllou, A. (2019). Volatility forecasting in commodity
markets using macro uncertainty. Energy Economics, 81, 79-94.
Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The
Quarterly Journal of Economics, 98(1), 85-106.
Bhattacharya, D. (2015). Nonparametric welfare analysis for discrete choice.
Econometrica, 83(2), 617-649.
Bhattacharya, D. (2018). Empirical welfare analysis for discrete choice: Some
general results. Quantitative Economics, 9(2), 571-615.
Bhattarai, K., Bachman, P., Conte, F., Haughton, J., Head, M., & Tuerck, D. G.
(2018). Tax plan debates in the US presidential election: A dynamic CGE
analysis of growth and redistribution trade-offs. Economic Modelling, 68,
529-542.
Blonigen, B. A., Flynn, J. E., & Reinert, K. A. (1997). Sector-focused general
equilibrium modeling. Applied Methods for Trade Policy Analysis: A
Handbook, 189-230.
Böhringer, C., Garcia-Muros, X., Cazcarro, I., & Arto, I. (2017). The efficiency
cost of protective measures in climate policy. Energy Policy, 104, 446-454.
Böhringer, C., & Rivers, N. (2018). The energy efficiency rebound effect in
general equilibrium.
Borges, A. M. (1986). Applied general equilibrium models. OECD Economic
Studies, 7, 7-43.
Calzadilla, A., Rehdanz, K., Roson, R., Sartori, M., & Tol, R. S. J. (2017). Review
of CGE models of water issues. In World Scientific Reference on Natural
Resources and Environmental Policy in the Era of Global Change. Volume
3: Computable General Equilibrium Models (pp. 101-123). World Scientific.
Cicowiez, M., Lofgren, H., & Escobar, P. (2017). How many households does a
Cge model need and how should they be disaggregated? Incomplete Draft.

Files

History

  • Receive Date: 07 August 2020
  • Revise Date: 10 January 2021
  • Accept Date: 26 January 2021

Share

How to cite

Statistics