Computable General Equilibrium Analysis of the Effect of Energy Carrier's Subsidies Reform on Inflation and GDP

Measuring the economic effects of energy subsidy reform and determining how to apply protective measures to reduce its negative effects are the most essential steps in determining the conditions and scenarios of energy price reform. This paper evaluates the effects of energy subsidy reform on inflation and GDP based on approved scenarios by Parliament in 2010 using standard computable general equilibrium (SCGE) model. The results show that reforming energy carrier’s subsidies without income redistribution will result in a significant fall in total production and employment and will lead to higher inflation. On the other hand, supportive government policies and income redistribution resulting from energy price reforms under various scenarios to producers and consumers considerably will compensate increased production costs and will decline the percent of unemployment and reduction in total production. In contrast, the increased liquidity resulting from redistribution increases the pressure of demand and inflation.