Optimal Combinations of Government Expenditures To Economic Growth Process in Iran

Journal of Applied Sciences Research, 6(5): 387-392, 2010
© 2010, INSInet Publication
Optimal Combinations of Government Expenditures
To Economic Growth Process in Iran
1
Ahmad Jafari Samimi, 1 Amir Mansour Tehranchian, 2 Masoud Abdi Rad
1
2
Department of Economics, Mazandaran University, Babolsar, Iran
MA Student of Economics, Mazandaran University, Babolsar, Iran
Abstract: This paper analyzes the design of macroeconomic policies for Iran during its forth five years
development plan (2005-2009). For this purpose, we develop and use a macroeconometric model using
Iran. Macro data for the period 1859-2004. W e determine optimal combination of government expenditures
as solutions of optimum control problems with a quadratic objective function and the macroeconometric
model as a constraint. The results show that, the optimal values of current and capital government
expenditures (except for the first year of government current expenditures) are greater than those proposed
in forth development plan. The comparison between the effects of the optimal combination of government
expenditures on goal variables, show that using the optimal combination of government expenditures,
without creating undesirable effect on unemployment rate, will improve the economic growth rate.
Key word: Optimal combinations of government expenditures, Stochastic optimal control algorithm, forth
five year development plan , Iran .
INTRODUCTION
The study of economic changes in economics
literature shows that requirement of government policymaking as fiscal instrument in economy, avoidable to
obtain the perceived goals[1 ] . Also, we know that
carrying out several policies are likely to conflict with
the other goals and in this condition cost all or some
of other goals, in due to interaction feedback effects
distortion. This revealed when intertemporal essence of
decision- making is focus. Therefore in spite of
substitution ability must optimize control of policymakers variables [2 ].
So, especially in middle of 1990 the more of
studies related to economic policies, used the
optimization models. So determine the policies or the
other words optimal fiscal instrument, state the
important policy-making duties each economic system
[3 ]
.
During the last few decades, Iran’s economy has
witnessed high inflation and unemployment and high
fluctuations in economic growth. Combating the above
problems has been one of the important goals of policy
making in Iran. Therefore, at the end of the imposed
war, the Iranian first, second and third development
plan were launched. Due to lack of coordinating
between the macroeconomic policies introduced some
of the main important goals proposed in these plans
were not accomplished.
The present paper deals with the quantitative
determination of Iran's optimal combination of
government expenditures in order to obtain the goals of
economic growth, inflation rate and unemployment rate
with minimum loss during the counting 4 th economic
plan (2005-2009).
To do so, first we have defined a dynamic
nonlinear system of macroeconomic equation and
calculated the effects of combination of government
expenditures imposed during the forth development
plan on macroeconomic variables using the simulation
technique. T hen the optimal combinations of
government expenditures are calculated by the optimal
control algorithm “OPTCON”. Finally we will compare
the effects of the optimal combination of government
expenditures on goal variables and ending paper with
concluding remarks.
The “Stochastic Optimal Control” Algorithm: W e
want to calculate time paths of macroeconomic policy
instruments that are “optimal” according to an objective
function of a hypothetical policy-maker for Iran. To
obtain optimal economic policies, we apply the
OPTCON algorithm, developed by Matulka and Neck
[4]
and M atulka, Neck and Karbuz [5 ] . OPTCON
determines approximate solutions of optimum control
problems with a quadratic objective function and a
nonlinear multivariable model. The objective function
has to be quadratic in the deviations of the state and
control variables from their desired values. The
objective function has the following form:
Corresponding Author: Ahmad Jafari Samimi, Department of Economics, Mazandaran University, Babolsar, Iran
E-mail: jafarisa @umz.ac.ir (A.J. Samimi),
387
J. Appl. Sci. Res., 6(5): 387-392, 2010
The models include goods, services market and
money markets from the aggregate demand side and a
production function and the labor market from the
aggregate supply side. The goods and services market
contain private consum ption function, private
investment function, government consumption function,
government investment function, imports and exports
functions. Also, the models include a money demand
equation and wage price system. The wage-price
system can be regarded as an enhanced Phillips curve.
W ages are determined by the price level and the
unemployment rate. The price level depends on wages
and the capacity utilization rate. A production function
is included to determine potential GDP [9 ] .The labor
market is modeled by specifying an employment
equation, whereas the labor supply is exogenous to the
model. As the stochastic model equations are estimated
by OLS, no full covariance matrix of the parameters is
available. In this case, only a limited stochastic
optimization can be run with the estimated standard
errors of the coefficients and the standard errors of the
regression equations taken into account.
In order to determine the approximate solutions
optimum government current and capital expenditures
(optimal combination of government expenditures),
three “main” objectives are considered. The “main”
objective variables are economic growth rate and
unemployment rate. The values of target for these
variables are the values, which targeted
in Iran’s
forth development plan. So, the planning horizon for
the control experiments has been chosen as 2005 to
2009. After several experiments sensitivity analysis we
hare chosen a discount factor á =1, the weight 1000
for main objective variables. Then, in the weight matrix
of the objective function, off diagonal elements were
all set equal to zero. In addition, all state variables in
the model not mentioned above, got the weight zero.
In order to compare the optimal combination of
government expenditures effects on the main objective
function variables with that of the proposed fiscal
policies in forth plan and the tentative path for state
variables, we used MAPLE 1 0 program for the
simulation of the model; we used GAUSS program to
determine the optimal combination of government
expenditures. The calculated optimum government
current and capital expenditures are compared with
those proposed valued in forth development plan in
table 2.
The table shows that, the optimal values of
government current and capital expenditures (except for
the first year plan of government current expenditures)
are greater than those proposed in forth development
plan. Table 3 shows the target values and the results
for the most important state variables of the simulation
and optimization run, respectively.
(1)
(2)
W here
denotes the vector of state variables,
u t denotes the vector of control variables,
and
are the desired values of the state and control
variables, W t is the matrix containing the weights given
to the deviations of the state and control variables from
their desired values, respectively, and a denotes the
discount factor. The dynamic system has to be given in
a state space representation. Although OPTCON can
solve deterministic and stochastic optimum control
problems, here we confine ourselves to deterministic
optimizations only.
So the dynamic nonlinear system is defined as:
(3)
In this system
and
are the expected
value of the stochastic parameter vector, exogenous
variables vector and the matrix of the additive system
noise respectively. As inputs of the algorithm, the user
has to supply the followings: the system function, the
initial value of the state vector, a tentative path for the
control variables, the expected value and the covariance
matrix of the stochastic parameter vector, the
covariance matrix of the additive system noise, the
weight matrices of the objective function, the planning
horizon, the desired paths for the state and control
variables, the tentative path for control and state
variables and a discount rate of the objective function.
T his algo rith m is ex e cutab le in ‘‘G A U SS’’
programming system [6 ,7 ].
Therefore, we used the "OPTCON" algorithm in
order to determine the optimal combination of
government expenditures for Iran during the forth
development plan. The constraint to the optimization
problem is given by a macro econometric model of the
Iran’s economy. The list of variables is shown in
appendix. The dynamic nonlinear systems include two
category of equation: behavioral equations and
identities. Table1 shows the estimated behavioral
equations and identities. The behavioral equations of
the model were estimated by O.L.S using time series
data for the period 1959-2004 [8] .
388
J. Appl. Sci. Res., 6(5): 387-392, 2010
Table 1: The equations:
N um ber
Equations
Behavioral:
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------1
CPR = 0.83 CPR (t-1) + 0.10 YDR
t: (21.7) (3.4) (2.1) DW = 2.02 R-2 = % 99
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------2
IN VPR = 0.84 IN VPR (t-1) + 0.21 IN VGR + 0.26 ? Dem and - 24.19 LTIR R
t: (11.54) (20.10) (14.30) (-0.14) D W = 1.49 R-2 = % 88
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------3
CGR = 0.19 CGR (t-1) + 0.65GCER
t: (1.83) (7.85) D W = 1.93 R-2 = % 98
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------4
IN VGR = 0.24 IN VGR (t-1) + 0.05 GD PR + 0.48 GM ER
t: (1.98) (3.55) (3.65) D W = 2.11 R-2 = % 87
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------5
IM PR = 0.69 IM PR (t-1) + 0.15 GD PR - 547.10 RPIM P
t: (5.13) (1.81) (- 0.85) DW = 1.85 R-2 = % 82
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------6
AGW N = 0.96 AGW N (t-1) + 3.54 CPI - 0.052 U R
t:(18.61) (4.72) (- 0.21) D W = 1.68 R-2 = % 99
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------7
CPI = 0.85 CPI (t-1) + 0.013 AGW N + 0.012 U TIL
t: (4.45) (1.69) (1.67) D W = 1.90 R-2 = % 99
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------8
EM P = 1.01 EM P (t-1) + 0.00057 GD PR - 0.053 AGW R
t: (75.81) (2.46) (-1.91) D W = 1.6 R-2 = % 99
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------9
LTIR N = 0.94 LTIR N (t-1) + 0.0000027 GD PR - 0.0000028 M 3R
t: (9.98) (0.91) (-0.62) DW = 1.71 R-2 = % 93
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------10
GD PDEF = 0.55 GD PD EF (t-1) + 0.0000027 GD PR + 0.54 IM PDEF
t: (5.42) (1.91) (6.29) D W = 1.89 R-2 = % 99
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------11
GD PPO T = 0.31 CAPR + 26.49 LFO RCE + 2050.64 TIM E
t: (6.13) (2.08) (8.53) D W = 1.83 R-2 = % 99
Identities:
12
GD PR = CPR + CGR + IN VR + EXPR - IM PR
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------13
IN VR = IN VPR + IN VGR + D IN VR
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------14
D em and = GD PR + IM PR
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------15
GRGD PR = (GD PR - GD PR (t-1)/GD PR (t-1))*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------16
GRCPI = (CPI - CPI (t-1)/CPI (t-1))*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------17
LTIRR = LTIR N - GRCPI
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------18
AGW R = (AGW N/CPI)*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------19
M 3R = (M 3N /CPI)*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------20
RPIM P = (IM PD EF/CPI)*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------21
U TIL = (GD PR/GD PPO T)*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------22
CAPR = CAPR (t-1) + IN VPR + IN VGR - D EPR
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------23
U N = LFO RCE - EM P
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------24
U R = (U N /LFO RCE)*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------25
GCER = (GCEN /GDPD EF)*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------26
GM ER = (GM EN /GD PD EF)*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------27
TAXRR = (TAXRN /GD PD EF)*100
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------28
Y D R = GD PR - TAXRR
*t, R-2 and D.W are the t statistic, adjusted R and Durbin W atson statistic respectively.
389
J. Appl. Sci. Res., 6(5): 387-392, 2010
Table 2: The values of optim al and third plan control variables
2005
2006
2007
2008
2009
GCEN
O ptim al
200897.3
266677.2
355466.0
83984.5
669933.4
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Proposed in the 222231.1
244457.5
268903.3
295793.6
325372.9
4th plan
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GM EN
O ptim al
176115.8
251502.9
340265.6
449972.3
583719.1
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Proposed in the 102820.7
134746.1
171070.4
214373.6
275841.0
4th plan
Source: author calculations.
Table 3: The result of optim ization and sim ulation results
2005
2006
2007
2008
2009
GRGD PR
O ptim ization results
7.0
7.3
7.7
8.3
8.9
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Sim ulation results
2.5
2.7
2.7
2.8
3.2
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------The forth plan targets
7.1
7.4
7.8
8.4
9.3
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------UR
O ptim ization results
12.0
11.6
11.0
10.2
9.4
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Sim ulation results
12.1
11.9
11.6
11.3
11.1
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------The forth plan targets
11.8
11.0
10.1
9.3
8.4
Source: author calculations.
Appendix. List of variables
State (or endogenous) variables
AGW N
Average gross wage rate per em ployee, nom inal
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------AGW R
Average gross wage rate per em ployee, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------CAPR
Capital stock, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------CGR
Governm ent consum ption, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------CPI
Consum er price index
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------CPR
Private consum ption expenditures, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------D em and
Total final dem and, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------EM P
Em ploym ent; 1,000 persons
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GCER
Governm ent currency expenditure, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GD PR
Gross dom estic product, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GD PD EF
GD P deflator
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GD PPO T
Potential GD P
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GM ER
Governm ent capital expenditure, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GRCPI
Annual growth rate of CPI (rate of inflation (
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GRGD PR
Annual growth rate of real GD P
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------IM PR
Im ports, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------IN VGR
Governm ent investm ent, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------IN VPR
Private investm ent, real
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
390
J. Appl. Sci. Res., 6(5): 387-392, 2010
Appendix. List of variables: Continue
IN VR
Total investm ent, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------LTIR N
Long-term interest rate, nom inal
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------LTIR R
Long-term interest rate, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------M 3R
M oney stock M 3, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------RPIM P
Relative price of im port
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------TAXRR
Governm ent tax revenue, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------UN
N um ber of unem ployed persons
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------UR
U nem ploym ent rate, % of the labor force
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------U TIL
Capacity utilization rate
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------YDR
Personal disposable incom e, real
Exogenous variables
D IN VR
Inventory change, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------EXPR
Exports, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------D EPR
D epreciation of fixed capital, real
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------IM PD EF
Im port price level (im port deflator)
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------LFO RCE
Labor force; 1,000 persons
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------M 3N
M oney stock M 3, nom inal
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------TAXRN
Governm ent tax revenue, nom inal
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------N TAXRN
Governm ent non-tax revenue, nom inal
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------TIM E
Linear tim e trend
Control variable
GCEN
Governm ent currency expenditure, nom inal
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GM EN
Governm ent capital expenditure, nom inal
As seen from the table3, the rate of economic
growth is close to forth plan targets with the optimum
combination of government expenditures than those
proposed by forth plan. Also, under optimum
co m b inatio n o f go v e rn m e n t e x p e nd itures the
unemployment rate will be the same both under
optimal and proposed forth plan.
the optimum combination of government expenditures
without creating undesirable effect unemployment rate,
will improve the economic growth rate.
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