The Impact of Exchange Rate Fluctuations and the Oil Price Shocks on Government Budget: CGE Model Approach

Authors

Department of Economics, University of Kurdistan, Sanandaj, Iran

Abstract

The exchange rate and international oil prices are vital variables that indicate the impact of external economic developments, agreements, and relationships. Since in countries like Iran, most of the government's revenue comes from exchange earnings from the international markets by oil exports, the impact of two variables on the economy has a significant outcome. Also, it should be considered how fluctuations in the exchange rate and international oil prices can affect the policy and international relations. According to a global trade standpoint, it is believed that the exchange rate affects the economy through the changes in exports and imports commodities; therefore, expected the exchange rate will affect the price of traded products. Moreover, the impact of the oil price on the production of items changes the level of supply for activities and income of institutions through the changes in the production factors and intermediary imports price. The results show that rising exchange rates and oil prices increase government revenue from sales of production factors; with rising prices and more sensitivity to oil prices, the government faces budget surpluses. Also, when the government faces a surplus or deficit, as much as consumption, saving, and changes a payment, which results from the optimality of the model. In addition, it is more critical that Iran's economy use policies that uniform direct tax rate point change for selected institutions, which is more optimal because the budget is less unstable.
 

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