Research Paper
Energy Economy
Saeed Rasekhi; Sara Ghanbartabar
Abstract
The utilization of natural resources, particularly energy, is essential for economic well-being. However, the increasing consumption of economic resources raises concerns about sustainable development. This study aimed to investigate the dynamic decoupling of economic growth, energy consumption, and ...
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The utilization of natural resources, particularly energy, is essential for economic well-being. However, the increasing consumption of economic resources raises concerns about sustainable development. This study aimed to investigate the dynamic decoupling of economic growth, energy consumption, and pollution in Iran from 2000 to 2020, employing the method proposed by Tapio (2005) and factor analysis on three levels of energy consumption (i.e., primary, final, and useful). The findings revealed that economic growth is often associated with negative decoupling, with this negative decoupling being more pronounced in useful and final energies compared to primary energy. Decomposing energy consumption further confirmed negative decoupling in various energy components. Additionally, the study confirmed weak decoupling between energy consumption and pollution (CO2 emissions), with stronger negative decoupling observed at lower energy levels. Furthermore, the decoupling of economic growth and pollution closely mirrors the decoupling of economic growth and energy consumption. The negative decoupling can be attributed to the inefficiency in energy consumption, limited access to new technologies, and the lack of appropriate structures due to the absence of a specific strategy for sustainable development. The research recommends the prioritization of energy efficiency across different energy levels as well as the investment in infrastructure and energy technology.IntroductionEconomic growth is intricately linked to the consumption of natural resources, with these scarce and costly resources serving as the primary catalyst for the development and acceleration of economic growth process in modern societies (Song et al., 2019; Song et al., 2020; Zhang et al., 2018). Meanwhile, the production and consumption of energy resources are associated with significant social costs and diminished welfare (Feng et al., 2020a; Feng et al., 2020b; Li et al., 2018; Rjoub et al., 2021; Wang et al., 2020). The world grapples with the challenge of balancing economic development and energy consumption (Bradshaw, 2010). Despite the looming threat of global warming, many countries, particularly developing nations, have prioritized economic development over environmental conservation (Shah et al., 2016). Consequently, decoupling energy consumption from economic growth is widely recognized as a significant achievement in the global effort to combat climate change and mitigate adverse environmental effects. The experience of developed countries instill hope for overcoming resource scarcity and growth limitations, as well as fostering green and sustainable economic growth. While relative decoupling has been achieved in numerous countries, absolute decoupling remains challenging and seemingly unattainable (Hickel & Kallis, 2020). In this respect, the present study aimed to scrutinize the decoupling dynamics of economic growth, energy consumption, and pollution in Iran from 2000 to 2020, employing the method proposed by Tapio (2005) as well as factor analysis across three energy levels.Materials and MethodsThe study followed the method proposed by Tapio (2005) in order to calculate the decoupling between energy consumption and economic growth. First, the decoupling elasticity coefficient was calculated as outlined below: (1)e(E) is the elasticity coefficient of decoupling between economic growth and energy consumption. ∆E represents changes in energy consumption during the time period under study. E (t-1) indicates energy consumption in the base year. ∆G refers to changes in GDP per capita during the time period, and G (t-1) indicates the GDP per capita in the base year (Wang & Zhang, 2021). In the method proposed by Tapio (2005), eight decoupling states can be distinguished (Figure 1).Figure 1. Decoupling states The present study conducted a more comprehensive analysis of decoupling by using factor analysis at various energy levels. In this line, the consumption across three energy levels (primary, final, useful) was divided into three distinct effects: activity (production rate), structural (change of economic structure), and intensity (technology effect). The logarithmic mean division method and each of these effects were used as follows: (2) (3) (4) (5)The study also divided economic activities into several categories: agriculture, services, industry, residential, and transportation. This categorization aligns with the most feasible separation based on the available data and statistical classifications within domestic data sources. In Iran’s energy balance, although household, public, and commercial sectors are categorized under one group, these sectors were individually reported, and the residential sector was distinguished from the commercial and public sector (as the service sector).Results and DiscussionFigure 2 presents the decoupling dynamics of Iran’s economic growth, energy consumption, and carbon dioxide emissions during 2000–2020. The figure is divided into two parts focused on various energy levels for different components: the first part depicts the decoupling of economic growth and energy consumption, while the second part shows the decoupling of energy consumption from carbon dioxide emissions. As show in Figure 2, the decoupling of economic growth and carbon dioxide follows a pattern similar to and influenced by the decoupling process between economic growth and fossil energy consumption. The decoupling of economic growth and fossil energy consumption aligns with changes in decoupling at different energy levels (primary, final, and useful), reflecting the significant share of fossil energy in Iran’s overall energy consumption. Figure 2 also highlights the weak decoupling between fossil energy consumption and carbon dioxide, which can be attributed to the nature of fossil fuel pollution. Consequently, the decoupling of economic growth from carbon dioxide is influenced by fossil energy consumption.The first part of Figure 2 reveals various forms of negative decoupling (expansive negative, weak negative, and strong negative) concerning economic growth and energy consumption. Correspondingly, the second part indicates a generally weak decoupling for different energy levels and carbon dioxide emissions. Within the energy consumption components, the intensity component exhibits strong decoupling, though it fluctuates, sometimes displaying positive decoupling (weak, recessive, and strong) and occasionally negative decoupling (expansive and strong negative)—which can be caused by the drop in technology. This finding aligns with the second part of Figure 2, where the decoupling of the intensity component and carbon dioxide experiences fluctuations. Notably, the structural component in the first part of Figure 2 exhibits the strongest negative decoupling from economic growth, signifying a change in Iran’s economic structure that has exacerbated the decoupling between energy consumption and economic growth. However, the decoupling of the structural component and carbon dioxide, as depicted in the second part of Figure 2, remains within the range of weak but fluctuating decoupling.Finally, the first part of Figure 2 indicates that economic growth is often associated with negative decoupling (expansive and strong negative) from total energy consumption. Despite weak decoupling in initial periods and subsequent fluctuations, the last two years show strong decoupling between total energy consumption and carbon dioxide. Overall, Figure 2 illustrates a fluctuating trend in the decoupling of economic growth and energy consumption over time, predominantly featuring negative decoupling, which corresponds to the decoupling trend between energy consumption and carbon dioxide. Among the components of energy consumption, the intensity component exhibits strong negative decoupling, while the structural component displays weak decoupling, both characterized by fluctuating patterns. This fluctuation may stem from the absence of a specific plan and strategy to decouple economic growth, energy consumption, and carbon dioxide.Figure 2. Decoupling of economic growth, energy consumption, and carbon dioxide emission in Iran during 2000–2020 Expansive negative decoupling decoupling ExpansiveWeak decouplingStrong decouplingRecessive decoupling Recessive coupling Weak negative decoupling Strong negative decouplingConclusionUsing the method proposed by Tapio (2005) and factor analysis across three energy levels, the present study investigated the dynamics of decoupling economic growth, energy consumption, and pollution in Iran during 2000–2020. The findings underscored challenges faced by the policy aimed at reducing energy consumption, which is primarily due to the dependency of Iran’s economy on energy. Specifically, the research showed the dependency of Iran’s economy on energy on energy consumption across all three levels: primary energy, final energy, and useful energy. Moreover, the results highlighted a low degree of energy efficiency, particularly at higher energy levels (secondary and useful). Considering the relation between environmental pressure and restrictions on economic growth, there is a pressing need to address energy intensity and energy efficiency to strike a balance between economic growth and energy consumption. The observed negative decoupling in structural, intensity, and activity effects suggests a lack of a specific strategy in Iran’s economy concerning the decoupling and balance between energy consumption and economic development. In light of these findings, it is imperative to focus on enhancing energy consumption efficiency across diverse energy levels. Additionally, the study recommends prioritizing more effective decoupling in sustainable development policies concerning energy consumption, economic growth, and pollution.
Research Paper
Game theory
Farshad Momeni; Reza Shohreh
Abstract
Over the past half-century, the impact of the prisoner’s dilemma has transcended its initial boundaries, influencing a broad spectrum of institutional studies and analyses of interdependent systems, such as collective action, public goods, governance of the commons, social norms, and social capital. ...
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Over the past half-century, the impact of the prisoner’s dilemma has transcended its initial boundaries, influencing a broad spectrum of institutional studies and analyses of interdependent systems, such as collective action, public goods, governance of the commons, social norms, and social capital. Given this extensive influence, the latent fundamental flaws in this model can lead to misleading result for researchers and policymakers. As a descriptive–analytical research, the present study employed evolutionary game theory to examine the shortcomings of the iterative and evolutionary prisoner’s dilemma. It went on to introduce an alternative framework to explain the emergence and transformation of institutions. The critical discussion highlighted fundamental deficiencies of the prisoner’s dilemma manifested in four distinct levels of institutional analysis: the definition of institutions, identification of their function, explanation of their emergence, and description of their transformations. Consequently, the model is not capable of explaining institutional issues mentioned above. Addressing the role of uncertainty and considering the impact of small-world networks on payoff distribution, the second part of the study used a semi-parametric stag hunt matrix to model the cooperation problem. The results indicated that the non-spontaneous overlap between strong and weak ties can accumulate synergistic flows between content and structure, creating an environment conducive to institutionalizing capacity for achieving public goods on a large scale. Therefore, the process of overcoming social traps begins not with the punitive rules proposed by the prisoner’s dilemma, but with synergetic institutions that enhance the opportunity to discover common interests.IntroductionThe relation between institutions and development has been well recognized for quite some time. Numerous studies have delved into collective action, public goods, the governance of the commons, informal institutions, social capital, and the like. These areas serve as a common ground between two realms of economics: the theory of institutions and game theory. However, the majority of game theory studies are based on the assumption that the payoff distribution follows the prisoner’s dilemma. In the payoff matrix of the prisoner’s dilemma, the additional benefit of unilateral non-cooperative action results in a dominant strategy, preventing rational players from attaining the mutual benefits of cooperation. The central question in this literature is: how have human beings successfully established society and built civilization? There are three general solutions in the literature on the iterative and evolutionary prisoner’s dilemma. The initial solution, incorporating concepts like meta-game, folk theorem, reputation effect, and the norm of reciprocity, asserts that if the game repeats endlessly, cooperation becomes a foresight-driven choice. Contrary to this approach that suggests a form of spontaneous order, some sociologists argue that negative externalities of individual actions cannot be resolved by foresight or reciprocity, so the evolution of cooperation is only achievable through authoritative relations and punitive norms. The third solution, rooted in a biological assumption, contends that the prisoner’s dilemma can be solved through instincts without the need for rationality. The current article critically examined each of these approaches, and then introduced another payoff distribution matrix to explain how cooperation evolves in human society.Materials and MethodsThis study used a descriptive–analytical method as well as evolutionary game theory.Results and DiscussionThe article can be categorized into two main sections: the critical discussion and modeling. In the critical discussion, the results drawn from agent-based networks indicated that, even in the case of an endlessly repeating game, the emergence of the first cooperators would remain unexplained within the specific payoff matrix. Then, it was demonstrated that a substantial gap between theory and observation arises due to the inadequacy of the Prisoner’s dilemma in representing uncertainty. The discussion also addressed the contradiction stemming from overlooking the institutional context, particularly in defining reciprocity and explaining the emergence of norms. Moreover, the discussion highlighted some tautologies hidden in these definitions and explanations. Finally, three reasons were presented to underscore that the biological approach falls short of explaining how cooperation evolves in small-world networks.The discussions highlight fundamental deficiencies in the prisoner’s dilemma across four distinct levels of institutional analysis: the definition of institutions, identification of their function, explanation of their emergence, and description of their transformations. At the definitional level, the logic is fundamentally flawed due to its oversight of uncertainty as well as the mere emphasis on non-cooperative payoffs. Concerning the identification of function, the model predominantly stresses control and punishment, neglecting synergetic institutions that enhance opportunities to discover common interests, foster social synthesis on a large scale, lay the foundation for social contracts, and legitimize punitive rules. Moreover, an evolutionary model can only explain the endogenous emergence and transformation of institutions if it first demonstrates how a payoff matrix, where non-cooperation is a dominant strategy, can create a sustainable learning process. According to the results of agent-based networks, such a process cannot be explained in the prisoner’s dilemma.Nevertheless, evolutionary models, by sidestepping the assumptions of perfect rationality and information, possess a suitable capacity for studying interdependent systems and institutional analysis. Therefore, an alternative model can be formulated by implementing some reforms, including the utilization of the stag hunt matrix to account for uncertainty, incorporating small-world networks to better align with human societies, and ultimately introducing a semi-parametric payoff matrix to incorporate the influences of social structures.The results from the revised stag hunt model showed that the non-spontaneous overlap between strong and weak ties can accumulate synergistic flows, creating a conducive environment to institutionalizing capacity for achieving public goods on a large scale. Therefore, the process of overcoming social traps begins not with the free ride punishments proposed in the prisoner’s dilemma, but with synergetic institutions that enhance the opportunity to discover common interests.ConclusionThe prisoner’s dilemma describes a great challenge concerning micro-level conflicts of interest. However, using this model to explain the emergence and transformations of institutions is bound to yield highly misleading results for researchers and policymakers. Instead, the theoretical framework proposed in this study should find application across a broad spectrum of institutional studies, including analyzing the impacts of inclusive institutions on overcoming social traps, designing society-oriented methods for governing the commons, explaining the accumulation and modeling the measurement of social capital, and examining the social consequences of economic inequality.Keywords: Institutions, Cooperation Problem, Evolutionary Game Theory, Prisoner’s Dilemma, Stag HuntJEL Classification: C73, O43.
Research Paper
Public sector economics
Ali Nassiri Aghdam
Abstract
The paper aims to reassess “the Coase Theorem” in its historical context and highlight the discernible gap between the Coase Theorem and the often-overlooked arguments articulated by Coase. In “the Problem of Social Costs”, Ronald Coase intended to emphasis on the irrelevance ...
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The paper aims to reassess “the Coase Theorem” in its historical context and highlight the discernible gap between the Coase Theorem and the often-overlooked arguments articulated by Coase. In “the Problem of Social Costs”, Ronald Coase intended to emphasis on the irrelevance of Pigou's argument in dealing with externalities. The theorem implies that in a world with zero-transaction cost, external effects are internalized without government intervention and the allocation of legal rights does not matter. These implications have led observers to criticize the theorem, notwithstanding the accurate scrutiny reveals that almost all of the critiques center around the main assumption of the theorem – namely, zero transaction costs- rather than the theorem itself. While the correctness of the theorem heavily depends on the concept of “transaction costs”, the concept suffers from a lack of clear definition. It is important to note, in that paper, Coase intended to argue that Pigou's analysis in “the Economics of Welfare” is irrelevant, and in a zero-transaction cost world, market forces internalize externalities, and government intervention is not needed. In contrast, when positive transaction cost is considered the allocation of legal rights and liabilities becomes important. This latter point has been almost ignored in the literature and entailed that the Coase theorem is an unrealistic one. IntroductionCoase Theorem stands as a highly discussed and well-developed theorem in law and economics. The theorem received too much of critiques even before the publication of the Coase’s seminal paper. These hot debates made “the Problem of Social Costs” one of the most cited articles in Law and Economics. In this paper I am going to reconsider the theorem in its historical context and highlight the discernible gap between the Coase Theorem and the often-overlooked arguments articulated by Coase in the aforementioned article.Methods and MaterialTo conduct the research, I adopted the library and document research method. To do so, I thoroughly reviewed Coase’s methodological background and highlighted his consequentialist mind as well as his approach to externalities and rejection of Pigouvian liability and taxation rules. Furthermore, I analyzed critiques of the Coase Theorem and discussed why the theorem has remained robust against those attacks. Finally, I argued why the Coase theorem is a misunderstanding of Coase’s approach to real economy and should be interpreted as the departure point of his theoretical approach to real economy.Results and DiscussionAnalyzing nuisance and externalities, respectively in legal and economic literature was at the core of the Coase’s discussion in “the Problem of Social Costs”. At the time, the dominant legal approach to delineate liability was fault based. The Pigouvian solution to internalize externalities had been developed based on this legal tradition. Based on Pigou, taxes have to be employed to motivate polluters or injurers to take into account the costs they impose on others without compensating them.Coase, first of all, intended to undermine these legal and economic approaches to liability and nuisance. He developed, in that paper, his consequentialist approach to law, based on which alternative liability rules should be assessed in terms of their consequences, and the adopted rule should entail higher total net benefit. This was evident in his opening discussion in which he mentions the case of Sturges vs. Bridgman.In addition, he highlights the role of property rights in performing economies as well as the power of markets in exchanging legal rights and allocating them to the parties who value the rights higher than other parties. He made this clear when he assigned legal rights to farmer and herder alternatively and concluded that the resulting property right is efficient and invariant, regardless of the initial holder of the legal right. This argument named by George Stigler, The Coase Theorem.In this approach, not only markets are considered as a mechanism which is capable to allocate rights efficiently but also what are exchanged in markets are considered as bundles of rights rather than mere physical goods and services. He emphasized on this critical point at the concluding part of the paper.Among these and other exciting issues, what absorbed most attentions was the Coase Theorem and even most of the critics allocated their time and effort to undermine the Theorem, while the Theorem was only the departure point of his arguments. In the first half of the paper, maybe under the influence of the Black Stone Avenue’s discussions, he considered the case in which costs of using price mechanism is zero and argued that in such a world, market exchanges would internalize externalities, government intervention is not required, Pigouvian taxes are irrelevant, and the allocation of legal rights does not matter.In this paper, I discussed alternative critiques of the Coase Theorem and indicated that almost all of them, in fact, argue that in a non-zero transaction costs world the theorem does not hold. This is why these critiques are, in effect, the proof of the theorem rather than its refutation. As a matter of fact, the Coase Theorem is a development of the first fundamental theorem of welfare economics, and both of them are valid in a zero transaction costs world.ConclusionAs indicated, Coase’s main argument is different from the Coase Theorem. While the latter underscores the irrelevance of legal rules, the former highlights the importance of legal rules in real world, in which transaction costs are positive. In this world, reducing transaction costs by defining legal rights is efficiency enhancing (normative Coase Theorem). Furthermore, Legal rights should be chosen based on their merits in economizing exchanges and supporting arrangements with higher total net benefits. This is the main mission of the law and economics.
Research Paper
Agriculture, natural resources and environment Economics
Simin Azizmohammadi; Fatemeh Bazzazan
Abstract
Human demand for natural resources is surpassing the Earth’s biocapacity and regenerative capacity, leading to environmental degradation. Accurate research is essential to investigate and predict these changes more precisely. The ecological footprint serves as a suitable index for tracking human ...
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Human demand for natural resources is surpassing the Earth’s biocapacity and regenerative capacity, leading to environmental degradation. Accurate research is essential to investigate and predict these changes more precisely. The ecological footprint serves as a suitable index for tracking human demand, resource recovery capacity, and waste absorption in the environment. The concept aims to offer a land-based measure that estimates the impact of consumption on the environment in the land area required to fulfill consumption. The dynamic input–output approach represents a novel method for measuring the ecological footprint, predicting land use based on economic growth rates. Pioneering the dynamic ecological footprint calculation using real-world data, the current study calculated Iran’s ecological footprint by relying on 1395/2016 input-output tables from the Central Bank in three sectors: agriculture, industry, and services. The per-capita ecological footprint for Iran was determined to be 0.42 hectares with an 8% planned economic growth rate. If the ecological footprint continues to grow at the same rate, it is estimated that Iran’s land biocapacity will be depleted by the year 1412/2033. Considering a growth rate of 6.4% (excluding oil) in the year 1395/2016, this scenario is anticipated to occur by the year 1417/2038. IntroductionLand use has undergone significant changes due to urbanization and the expansion of economic activities, surpassing the Earth’s capacity for regeneration and absorption and resulting in environmental degradation. Exacerbated by population growth, the issue has caused more serious concerns among policymakers and researchers regarding the future of the environment. It is thus necessary to measure human demand and regenerative capacity of natural resources. In this respect, the ecological footprint is considered a useful measure, defined as an environmental index that quantifies natural resource consumption based on land use, and reflects the impact of human demand on nature. The comparison between human consumption and biocapacity aids in assessing the level of sustainability. Existing literature refers to two methods of ecological footprint calculation. Employing a macro perspective, the first method relies on the evident consumption of resources (land or water) involved in producing domestic goods and services—including imported goods but excluding exported goods. Many scholars have used the input–output model to calculate the ecological footprint for resource management at the sectoral level. The versatility of the model has led to its widespread application in recent years, as it can adapt to variations in monetary and physical units at the same time. It proves particularly useful in analyzing a wider range of environmental issues, such as life cycle assessment and ecological footprint calculation. While the ecological footprint is a vital tool for studying sustainable development, its traditional version primarily focuses on static calculations derived from past footprints. Some critics contend that ecological footprint analysis lacks a dynamic approach to the future, but offers more of a snapshot in time. Dobos and Tóth-Bozó (2023) employed a dynamic input–output model to develop a method for ecological footprint calculation. Within this dynamic model, the ecological footprint becomes predictable through the utilization of the capital coefficient matrix (investment matrix) in conjunction with the direct input coefficient matrix. The present study pioneered the dynamic ecological footprint calculation by utilizing real-world data and the dynamic input–output table of the year 1395/2016.Materials and MethodsThe study employed a dynamic input–output model that maintains equilibrium between supply and demand over specific time periods. Investment was taken into account through capital-output coefficients within an intra-sectoral capital coefficient matrix which shows capital exchanges between demand sectors and capital suppliers, proving valuable in predicting crucial economic variables and growth patterns. It also serves as an efficient tool for economic planning. The model proposed by Dobos and Tóth-Bozó (2023) is a function of vectors representing final consumption, exports, and imports of final goods. They had actually used the dynamic model developed by Leontief (1970) to calculate land demand for each period of national production. The present study showed how the index changes by taking into account the investment flow and the equilibrium path of consumption and production growth. The total ecological footprint is predicted in relation to the potential economic growth rate; Iran’s Sixth Five-Year Economic, Cultural and Social Development Plan (1396–1400); and the growth rate excluding oil in 1395/2016. To accomplish this, three sectors (agriculture, industry, and services) were formed within a closed dynamic input–output model, referred to as forward-looking. The data was gathered from the 1395/2016 input–output table from the Central Bank database, capital stock, inventory data (agriculture and industry) from the Statistical Center of Iran. The lands were studied in three sectors: agriculture, industry, and services.Results and DiscussionIn the dynamic input-output model, the potential growth rate is determined by the maximum eigenvalue of the matrix composed of the direct input coefficient matrix and the capital coefficient matrix. The potential growth rate was found to be 41%. Moreover, the planned growth rate of 8% in Iran’s Sixth Five-Year Economic, Cultural and Social Development Plan (1396–1400) was also considered. According the Statistical Center of Iran, the gross domestic product experienced an overall growth of 11.1% in 1395/2016. Excluding oil, this growth rate stands at 6.4%. The per-capita Iranian ecological footprint was measured at 0.42 hectares with an 8% planned economic growth rate. If the ecological footprint continues to grow at the same rate, it is estimated that Iran’s land biocapacity will be depleted by the year 1412/2033. Considering a growth rate of 6.4% (excluding oil) in the year 1395/2016, this scenario is anticipated to occur by the year 1417/2038.ConclusionAccording to the research results, changes in the growth rate alter the time horizon for land use. The growth rate is influenced by various factors. Consequently, advocating for short-term planning becomes crucial to either manage its effects in the long run or mitigate its adverse consequences—in case of its deviation from sustainable development goals. This model does not incorporate assumptions about technological progress in the economy. Future research could enhance the economic model by integrating technological progress, allowing for the evolution of model matrices over time. In the contemporary economy, Research and Development (R&D) plays a vital role in developing new technologies to promote environmental preservation. Furthermore, providing ample data can enable the creation of inverse Leontief matrices with larger dimensions, facilitating more practical outcomes, such as dynamic analysis of land-use changes within specific timeframes. The current research exclusively sought to introduce the index alongside its predictability. However, the absence of sufficient data might have resulted in estimates based on unrealistic data, impacting the accuracy and validity of the results. Nonetheless, these findings can aid in large-scale policymaking.
Research Paper
Macroeconomics
Sohail Rudari; Seyyed Hadi Arabi; Sanaz Rahimi Kahkashi
Abstract
The present study aimed to examine the transfer, reception, and the spillover of volatility from March 1982 to September 2022, using the time-varying parameter vector autoregression model based on Barunik-Krehlik (TV-VAR-BK) with monthly frequency. The results indicated that the primary relationship ...
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The present study aimed to examine the transfer, reception, and the spillover of volatility from March 1982 to September 2022, using the time-varying parameter vector autoregression model based on Barunik-Krehlik (TV-VAR-BK) with monthly frequency. The results indicated that the primary relationship among the volatility of the analyzed variables is of long-term nature, with the exchange rate emerging as the dominant factor in explaining the volatility of the examined network. In the short term, liquidity serves as the primary transmitter of volatility to inflation and the exchange rate. However, in the medium and long term, the exchange rate becomes the primary transmitter of volatility to inflation, while liquidity acts as the net receiver of currency volatility. Additionally, the long-term impact of the exchange rate is more pronounced. Failure to control currency volatility can lead to inflation turbulence by transferring volatility to liquidity, underscoring the significance of exchange rate stability in managing liquidity and inflation.IntroductionThe exchange rate is one of the key factors influencing inflation. In addressing the impact of exchange rate volatility, the status of inflation plays a crucial role (Tahsili, 2022). Moreover, assessing the factors influencing the exchange rate stands as one of the most challenging empirical problems in macroeconomics (Williamson, 1994). Since the exchange rate is significant economic indicator in any country, alterations in monetary variables (e.g., liquidity and inflation rates) as well as non-monetary variables can lead to fluctuations and instability in the exchange rate (Amrollahi et al., 2021). The causality of volatility between money and inflation can vary depending on economic conditions (Al-Tajaee, 2019). A deeper understanding of liquidity growth dynamics, inflation, and exchange rates in Iran elucidates the reasons behind high inflation, rapid and continuous liquidity growth, and the impact of exchange rate volatility. Extreme changes in each variable overshadow the others, indicating a complex relationship among exchange rates, inflation, and liquidity. Examining the relationship between the volatility of different assets unveils the phenomenon of volatility spillover, where fluctuations in one component trigger volatility in others. An additional crucial aspect is understanding the modes of transmission, reception, and intensity of the causal relationship among exchange rates, inflation, and liquidity in Iran during different periods. In different years, the mutual influence of these components may have varied based on political, economic conditions, health, and pandemic issues, each of which impacting decision-making concerning exchange rates, inflation, and liquidity as three vital macro-economic components. In this respect, the present study used the time-varying parameter vector autoregression model based on Barunik-Krehlik (TV-VAR-BK) with monthly frequency in order to examine volatility spillover from March 1982 to September 2022 in Iran, providing a new perspective on investigating causality by analyzing the time-frequency volatility among exchange rates, inflation, and liquidity.Materials and MethodsThis study is applied and analytical in terms of its purpose and research method, respectively. The data was sourced from the Economic Accounts Department and the National Accounts of the Central Bank. The TVP-VAR-BK model was employed to analyze the time series among exchange rates, inflation, and liquidity. The TVP-VAR-BK model helped analyze the transmission and reception of volatility of variables across different periods (short-term, medium-term, and long-term). Furthermore, the analysis delved into whether the variables acted as net receivers or net transmitters of volatility.Results and DiscussionThe results showed that, in the short term, liquidity exerted the most significant influence and transmitted volatility to other variables. Notably, the most substantial impact and transmission of volatility by the liquidity occurred in 2013, following the tightening of sanctions on Iran. In the medium and long term, the exchange rate emerged as the most influential factor on other research variables.Examining the causal relationship in the short term, a strong causal connection was identified from liquidity volatility to inflation and the exchange rate. However, no causal relationship was observed between inflation and the exchange rate in the short term. Therefore, in the short term, liquidity could be the primary cause of volatility in inflation and the exchange rate. Failure to control short-term liquidity volatility could lead to severe volatility directly and indirectly within the studied network.Moving to the medium term, the transfer of volatility was predominantly from the exchange rate to liquidity and, to a lesser extent, from liquidity to inflation. In the medium term, the transfer of volatility from the exchange rate to inflation was less pronounced. This suggests that fluctuations in the exchange rate strongly transfer volatility to liquidity in the medium term, and liquidity significantly contributes to the emergence of inflation volatility. The exchange rate, albeit to a minor extent, can directly contribute to the transfer of volatility to inflation. This underscores the dominant role of the exchange rate in the network during the medium term.In the long term, no causal relationship between liquidity and inflation was observed, and there was no causality in the transfer of volatility between inflation and the exchange rate. This implies that factors other than the investigated network can explain inflation volatility in the long term. Although there is causality in the transfer of volatility from the exchange rate to liquidity in the short- and medium-term periods, this causality is stronger in the long term. Hence, while the classical view on liquidity and inflation holds until the medium term, the post-Keynesian view becomes evident in the long term. Overall, the exchange rate stands out as the dominant factor in the investigated network. Without stability in the exchange rate, Iran’s economy shall anticipate the fluctuating growth of liquidity and inflation in the short- and medium-term periods.ConclusionThe primary relationship among the volatility of the examined variables proved to be long-term, with the exchange rate emerging as the dominant factor explaining the volatility within the investigated network. In the short term, liquidity functioned as the net transmitter of volatility to inflation and the exchange rate. However, in the medium and long term, the exchange rate takes on the role of the primary transmitter of volatility, while inflation and liquidity assume the positions of net receivers of currency volatility. Moreover, the impact of the exchange rate was found to be notably stronger. Should exchange rate volatility remain uncontrolled, it has the potential to induce inflation volatility by transferring it to liquidity. This underscores the critical importance of maintaining exchange rate stability for the effective control of liquidity and inflation.
Research Paper
Optimization
Mehrnoosh Khaji; Maghsoud Amiri; Mohammad Taghi Taghavifard
Abstract
The present study aimed to develop a model for determining an optimal bidding strategy for electricity producers, including the recommended selling price and the amount of electricity to be offered for participation in both the competitive electricity market and the energy exchange market. Hourly bids ...
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The present study aimed to develop a model for determining an optimal bidding strategy for electricity producers, including the recommended selling price and the amount of electricity to be offered for participation in both the competitive electricity market and the energy exchange market. Hourly bids are suggested for the electricity market, while a monthly package, comprising peak load, medium load, low load, and base load, is proposed for the exchange market. By modeling a self-scheduling problem, the study aimed to develop optimal power production plans that maximize net profit over a one-month period. The research approach involved mathematical modeling using mixed-integer non-linear programming, which was performed in Lingo software and then validated in terms of effectiveness through an application to the case of a thermal power station. Relying on fuzzy necessity, credibility, and possibility, the research presented a robust model against the uncertainty of price with an adjustable level of robustness. Sensitivity analysis and the simulation approach were used to validate the performance of the model, demonstrating that the optimal response from the robust model, compared to the deterministic model, can maintain its efficiency in the face of fluctuations in the parameter of price uncertainty. Furthermore, the findings indicated that offering a base load package on the energy exchange market can yield a higher net profit value for the producer. Finally, the fuzzy interest rate and decision-making based on fuzzy goals were also examined.1. IntroductionIn recent years, researchers have directed their attention toward robust optimization in markets with uniform pricing systems. However, the application of robust methods in pay-as-bid systems remains unexplored. Therefore, a notable research gap exists, specifically in the robust optimization of pay-as-bid systems in the Iranian electricity market. Moreover, with the establishment of the energy exchange market in Iran, the simultaneous bidding, in both the energy exchange market and the day-ahead electricity market, has surfaced as a significant gap in existing research literature. In this respect, the present study contributes to relevant research by addressing existing gaps while considering the specific needs of the Iranian electricity market. The study tried to model the self-scheduling problem of an electricity producer to determine an optimal and robust strategy. Employing fuzzy theory to address the uncertainty of the market clearing price parameter, the model can protect the producer from electricity price uncertainty in the market, as well as foster a more secure environment for participation in competitive electricity markets.2. Materials and MethodsAs an applied and developmental research, the present study aimed to develop robust optimization models for bidding in the electricity market. This descriptive–analytical study examined, described, and explained uncertainty in decision-making, employing a fuzzy approach to tackle uncertainty. The research involved the mathematical modeling of the problem of determining the bidding strategy for electricity producers, presented as mixed-integer programming. First, the variables and parameters of the modeling process were introduced, followed by presenting the problem formulation. Subsequently, the implementation and its procedural steps were performed in the Lingo software to validate the effectiveness of the proposed model by applying it to the case of a thermal power station. 3.Results and DiscussionThe research proposed a model designed to address bidding challenges encountered by a price-taker electricity producer. The model centers on optimizing simultaneous monthly bidding in both the day-ahead electricity market and the energy exchange market. The objective is to optimally allocate the producer’s capacity between these two markets to maximize profit. To handle the uncertainty of electricity prices, a robust method is employed, necessitating estimates of the next day’s market price and the energy exchange price for the upcoming month. The proposed model underwent testing across various modes, including base load, off-peak load, medium load, and peak load packages. The results revealed that the producer’s profit is maximized when offering the base load package to the energy exchange market, followed by the medium load package. Peak and off-peak packages ranked third with equal values. Therefore, it is recommended for producers seeking participation in the energy exchange market to consider offering a base load package.4. ConclusionThe present research employed a robust fuzzy technique to deal with the volatility of electricity market prices, allowing decision-makers to make firm decisions with an adjustable level of robustness. The results of the proposed method indicated that the possibility criterion adopts an optimistic stance towards the settlement price, thus suggesting prices at higher levels than the necessity and credibility criteria. This criterion is suitable only when market signals indicate a potential price increase. In contrast, the necessity criterion adopts a cautious approach, showing robustness even at low confidence levels. This approach is well-suited for risk-averse decision-makers and scenarios where market signals point towards a potential price reduction.
Research Paper
Macroeconomics
Zahra Sheikhali Zadeh; Jafar Haghighat; Zahra Karimi Takanlou; Seyed Saleh Akbar Mousavi
Abstract
The present study aimed to explore the impact of banking crisis on income distribution among various income classes in 60 world countries during 1990–2020. In this line, the Generalized Method of Moments (GMM) was used to estimate the six models with different dependent variables that depicted ...
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The present study aimed to explore the impact of banking crisis on income distribution among various income classes in 60 world countries during 1990–2020. In this line, the Generalized Method of Moments (GMM) was used to estimate the six models with different dependent variables that depicted income percentiles for the wealthy, middle, and poor classes. The findings indicated that during a banking crisis, the income share of the wealthy class decreases, while the middle class and the bottom 20% experience an increase in their income share. Consequently, banking crisis could contribute to income equality in the countries under study. In addition to the variable of banking crisis, other variables such as financial development and financial openness could lead to income inequality, while the variables like the ratio of public expenditure to GDP, trade openness, GDP, and GDP squared would cause income distribution equality in the countries. The results suggest that governments support lower-income percentiles through subsidies, support packages, more job opportunities, and provision of low-interest loans, in a bid to mitigate the detrimental effects of banking crisis and reduce income inequality. Furthermore, governments should levy taxes, such as capital gains tax, on higher-income percentiles.IntroductionThe literature offers various definitions for banking crisis. For instance, Liana et al. (2015) define banking crisis as the occurrence of simultaneous bankruptcies within the banking sector, resulting in substantial damage to the capital of the entire banking system, significant economic repercussions, and government intervention. According to Laeven and Valencia (2020), banking crisis occurs when two conditions are met: 1) “significant signs of financial distress within the banking system (indicated by significant bank runs, losses in the banking sector, and/or bank liquidations)” and 2) “significant intervention measures in banking policy in response to significant losses in the banking system.” The year in which both criteria are met is the year when crisis becomes systemic. Banking crisis exerts a myriad of effects, with one notable consequence being the issue of income inequality. There are two points of debate in this respect: the impact of banking crisis on income inequality and the reciprocal influence of income inequality on banking crisis. This research focused on the former. There are various channels through which banking crisis can adversely impact households and their income, including:(a) Loss of deposits in a failed banking institution(b) Loss of employment or earnings directly due to (i) disruption of the payments process, (ii) the bankruptcy of financial institutions (for employees and other stakeholders of these institutions) or (iii) the interruption of credit flows (for borrowing clients with information capital invested in the failed financial institutions)(c) Tax increases or curtailment of public spending due to fiscal cost of bail-outs of financial firms or their customers(d) Temporary or permanent changes in relative prices of (i) consumption goods, (ii) wage rates, (iii) production goods (iv) asset prices, that arise through knock-on effects on the rest of the economy(e) Involuntary unemployment if the crisis leads to a generalized economic downturn. (Honohan, 2005, pp. 6–7)In this context, the present study tried to answer the following questions: How does a banking crisis influence the income distribution of households and contribute to income inequality? Is the presumed impact the same across different income classes (i.e., wealthy, middle, and poor)?Materials and MethodsIn line with El Herradi and Leroy (2022), the present study used the following economic model:(1) In the model, refers to the income share of six different percentiles (p) including Top1%, Top10%, Top20%, Middle-class (21–79 percentile), Bottom20% and Bottom10% in the country i at the time t. is a dummy variable of the banking crisis (1 if a country i faces a banking crisis, otherwise 0). indicates the dependent variable of income distribution, with two lags to show the dynamics of the model. Finally, is a vector of lagged control variables, including GDP and GDP squared, financial development, trade openness, financial openness, the ratio of government public expenditures to GDP and political governance. Also, , and refer to country fixed effects, time fixed effects and an error term, respectively. , and k are model coefficients. The study sample comprised 60 countries worldwide, with annual data spanning the years 1990 to 2020.Results and DiscussionThe occurrence of a banking crisis is linked to significant yet varied effects across the income distribution. Consequently, during a banking crisis, the income shares of the top 1%, top 10%, top 20%, and bottom 10% experienced a decrease. Moreover, a banking crisis resulted in an increase in the income share of the middle-class population (21–79 percentiles) as well as the bottom 20% of individuals. Notably, the rise in the middle class was more substantial. Conversely, the lowest income group (the bottom 10%) exhibited a negative correlation between banking crisis and income share, mirroring the trend observed in the upper percentiles. However, the reduction in the income shares of the lowest income group (the bottom 10%) is considerably less than the losses suffered by higher income groups. According to the findings, the adverse impacts of banking crisis are more pronounced at the right end of income distribution. Therefore, the crisis could contribute to a reduction in income inequality.ConclusionThe findings indicated that a banking crisis adversely affects the income shares of the top 1%, top 10%, and top 20%. In simpler terms, a banking crisis diminishes the income share of these groups in the overall income of society. Notably, the reduction in the income shares of the top 10% (-0.426) is more pronounced compared to the top 1% and top 20% percentiles. Conversely, a banking crisis can increase the income share of the middle class (21–79 percentiles) and of the bottom 20% (i.e., the poor class), with a particularly substantial increase observed in the middle class. Turning to the lowest income group (the bottom 10%), a negative correlation exists between banking crisis and income share. Despite facing a decrease in income similar to the top income percentiles, the decline in their income share is considerably less than the losses experienced by the wealthy percentiles.In summary, a banking crisis could diminish the income share of the wealthy class and increase the income share of the middle and lower classes, contributing to a reduction in income inequality in the studied countries. Consequently, to mitigate the adverse effects of a banking crisis, governments can provide support to low-income percentiles through subsidies, support packages, more job opportunities, and low-interest loans. Additionally, taxes on high-income percentiles, such as capital gains tax, can be helpful. The measures can ultimately lead to a reduction in the income share of the wealthy percentiles and an increase in the share of the lower percentiles, improving income distribution and reducing income inequality.
