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A MACROECONOMIC ANALYSIS OF ENERGY SUBSIDIES IN A SMALL OPEN ECONOMY
Author(s) -
Glomm Gerhard,
Jung Juergen
Publication year - 2015
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12221
Subject(s) - economics , subsidy , consumption (sociology) , investment (military) , small open economy , production (economics) , welfare , energy consumption , macroeconomics , microeconomics , market economy , ecology , social science , sociology , politics , biology , political science , exchange rate , law
We construct a dynamic model of a small open economy to analyze the effects of large energy subsidies. The model includes domestic energy production and consumption, trade in energy at world market prices, as well as private and public sector production. The model is calibrated to Egypt and used to study reforms such as reductions in energy subsidies with corresponding reductions in various tax instruments or increases in infrastructure investment. We calculate the new steady states, transition paths to the new steady state, and the size of the associated welfare losses or gains. Our main results for a 15% cut in energy subsidies are: (1) Steady state gross domestic product drops in most of our experiments as less energy is used in production. (2) Steady state consumption rises in most of our experiments. (3) Welfare can rise by as much as 0.6% in consumption equivalent terms. (4) The largest gains in terms of output and of welfare can be obtained when savings from energy subsidy cuts are used to fund additional infrastructure investment. ( JEL E21, E63, H55, J26, J45)