A Financial General Equilibrium Model for Assessment of Financial Sector Policies in Developing Countries

This paper introduces a real-financial CGE (computable general equilibrium) model for economic policy analysis. It is a multi-investor, multi-asset, and multi-sector model appropriate for what-if policy analysis in a single-country open-economy framework. The financial side includes a central bank, commercial banks, deposits, loans, equities, bonds, and foreign currency. We also consider markets for loanable funds. The model assumes small open economy, imperfect capital mobility, imperfect Armington substitution between imported and domestic commodity, nested CES (constant elasticity of substitution) structure in production, nested CES structure in consumption, and heterogeneity of domestic products in one commodity category. We consider the transport margin, wholesale margin, import tariffs, import subsidy, production tax, value added tax, goods and services tax, and other transfer payments. We calibrate the model based on the 1999 Social Accounting Matrix of Iran. This matrix includes 47 production activities and 112 commodity categories detailed on hydrocarbon resources.