Vulnerability of Utility to Economic Shocks: Evidence from Households in Iranian Provinces

Document Type : Original Article

Authors

• mohammad hassan fotros ¹
• yaghob fatemi zardan ²

¹ Professor of Economics of Bu- Ali Sina University

² Ph.D. in Economics of Bu Ali-Sina University

https://doi.org/10.22067/erd.2022.70683.1049

Abstract

Extended abstract
1- INTRODUCTION
One of the concerns of economists in recent decades has been the issue of shocks and their effects on household behavior. Given the high impact of economic variables on household behavior, which is often measured by the utility; Undoubtedly, these economic shocks will cause changes in this sector.
2-THEORETICAL FRAMEWORK
The idea of ​​utility in economic theories of the 17th and 18th centuries was proposed in Europe, especially in England, by economists such as Adam Smith, John Stuart Mill, and Jeremy Bentham, who believed that people move in order to gain pleasure and avoid pain. But later other economists developed these utility functions. Nowadays, extensive research has been done in the field of utility extraction and depending on the type of study, different utility functions are used that consumption and income are the main basis of these functions. Despite the high importance of this discussion, so far, no studies have been conducted on the extraction of utility functions for the provinces and also how economic shocks affect these provincial utility functions in Iran and the limited studies that have been done in this area are mostly national.
3- METHODOLOGY
This paper extracts the household utility of each province in the first phase and then examines the effects of shocks from macroeconomic variables on it during the period 2001-2019. To calculate the coefficients required to derive the utility function, the Panel ARDL model in EViews software was used. Also, Bayesian Panel VAR model in MATLAB software was used to analyze the effects of shocks on the utility function.
4- DISCUSSION
The results of the estimate showed that the inflation shock first increases the utility. But over time, its effect on the utility of all provinces decreases. Perhaps one of the reasons that rising inflation has increased household utility in first time is that the utility function is obtained with the help of the consumption function. Therefore, with increasing inflation, the household increases its consumption expenditures, which leads to an increase in utility. But over time, due to the persistence of inflation, the household gradually reduces its consumption, which in turn leads to a reduce in household utility. However, the results of the inflation rate shock on the utility of all provinces except Isfahan, Khorasan Razavi and Mazandaran are significant. Also, the results showed that a positive shock in government spending leads to increased household utility. This increase in utility for most provinces persists after 20 periods, and only for some provinces the effects of this shock disappear. Probably the main reason for the increase in utility as a result of the increase in government spending is that an expansionary fiscal policy stimulates demand and increases household consumption, and since the utility function is obtained with the help of the consumption function; Finally, increasing consumption will increase utility. Also, the results of the government spending shock on the utility of all provinces except Ilam and South Khorasan are significant. In addition, according to the results, the effects of a positive shock on oil revenues in the first place reduce household utility in all provinces. But gradually this diminishing effect on utility disappears. Also, the results of the oil revenue shock on the utility of all provinces are significant. Finally, a positive exchange rate shock increases household utility in the first period; However, from period 2 onwards, with the emergence of the effects of exchange rate shocks, such as rising inflation and declining purchasing power, and ultimately declining consumption, household utility in all provinces gradually decreases. Also, the results of the exchange rate shock on the utility of all provinces are significant. Also, based on the results of the analysis of variance, with the passage of periods, the effectiveness of the utility variable as a dependent variable has decreased and the effects of other variables have increased over time. Also, the effects of analysis of variance showed that in period 1, all the effects of analysis of variance are absorbed by the variable itself. However, most of the effects of analysis of variance (excluding the effect of self-variable) on utility after 20 periods vary for different provinces between inflation and government spending. Also, the least effects of analysis of variance of different variables after 20 periods on the utility between different provinces differ between exchange rates and oil revenues. In addition, the maximum and minimum effects of analysis of variance on the utility function of the variable itself are for the provinces of Tehran (99.58) and East Azerbaijan (31.53), respectively. Also, for the variables of inflation, government expenditures, oil revenue and exchange rate, the effect of analysis of variance on utility was the highest for Lorestan, Sistan and Baluchestan, Hormozgan and Kurdistan provinces, and the least effect has been obtained for Semnan, Tehran and Kohgiluyeh Boyer Ahmad, respectively.
5- CONCLUSION & SUGGESTIONS
According to the results, it was found that most shocks change the utility of the household. Also, in recent years, the amount of household utility in each province has decreased. One of the main reasons for this decline is the existence of various sanctions and severe fluctuations in macroeconomic variables. One way to prevent welfare decline is for the government to reduce its dependence and indirect household dependence on oil revenues. In fact, since the bulk of the government's revenue is provided in this way, it can easily affect the household by imposing sanctions or international fluctuations in this variable. Therefore, policymakers and planners need to pay special attention to this issue. Also, according to the results, it was found that over time, the value of e has decreased, which indicates a decrease in government intervention and its policies to reduce inequality and income distribution in low-income provinces. In other words, during this period, policymakers' attention to inequality has decreased and in the implementation of projects, less attention has been paid to low-income groups. Therefore, planners need to reconsider their policies in order to improve the situation and pay more attention to lower-income groups and provinces.

Keywords

• Household utility
• economic shocks
• Bayesian model

References

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