Analyzing the Impact of the Removal of Basic Commodity Subsidies on the Main Macroeconomic Variables within a Structural Macro Econometric Framework

Following the Islamic revolution and the imposed war, Iranian economy was faced with a persistent inflationary era. To combat inflation and help the low income families, Iranian government subsidized the basic commodities for a long period of time. As a consequence, relative prices were distorted which resulted in misallocation of economic resources.
Recently the government decided to announce an economic reform plan to eliminate indirect subsidies and instead follow a direct money transfer to the needed families. It is thought that this kind of subsidy program will boost economic growth and bring about social justice. But the question is what adverse possible consequences it will impose on the economy of the country.
This article investigates the effect of eliminating basic commodity subsidies on the major macro economic variables, such as inflation and economic growth, within a structural macro econometric model framework. It is found that if all subsidies are removed immediately, inflation rate will increase by %22.2 in the first year of implementing the program. Also, economic growth will decrease by %4.06 and will reach reduced to %1.96.
In an alternative scenario, if the program is implemented gradually in 5 years time, the inflation rate will increase by %19.2 in the first year, but will gradually decrease over the successive years. Moreover, economic growth will decrease by %4.2 and will lead to %2.