Comparing Effects of Two Policies Reducing Interest Rate and Increasing Supply of Credits on Growth of Production in Iran: A FCGE Analysis

This study investigates the effects of two policies of reducing profit rate and increasing supply of credits on the growth of production in the economic sectors in Iran. To achieve the goal, the ORANI-G computable general equilibrium model was modified tothe present situation of Iranian economy. The model was also extended to accommodate the financial sector of the economy. To use the CGE model, a financial social accounting matrix based on the latest input-output table published by Statistical Center of Iran in the year 2001 was developed. Using the developed model, two scenarios were simulated. Simulation results of reducing interest rate of credits supplied to the sectors showed that the effects of this scenario on expansion of economic sectors is higher than the impact of the second scenario in the form of increasing supply of credits. This increased the real GDP growth rateby almost twice (1.2% versus 0.6%) of that in the second scenario. furthermore, the total exports experienced positive growth in the first scenario while it faced the negative growth in the second one. Additionally, a reduction in the profit rate of credits reduced prices of commodities and services, which in turns increased the inflation rate by 0.53 percent. However, increase in supply of credits led to an increase in the prices of commodities and services. This caused a rise in inflation rate by 0.04 percent. Increase in supply of credits, however, caused an increase in fixed capital formation in the economy by 1.6 times comparing to the profit rates reduction scenario. These results revealed that there is a compromise between these two policies with respect to their effects on the economy. Based on the goals and priorities of policymakers, one of the policies might be preferred to the other one.