This paper examines the short and long run effects of the 2010 Iranian energy subsidy reform on macro indicators including GDP and inflation. The subsidy reform, which consists of a simultaneous energy subsidy cut and a cash transfer to households, is not fiscally motivated but instead aims to reduce energy consumption. Using timeseries to analyse the dynamics of the macro variables in response to the subsidy reform elements (energy price increase, and cash transfer), I find that the subsidy reform has a negative effect on the economy in the short-term, and the cash transfer to households does not fully compensate for this adverse effect. These results are robust and consistent across specifications. The strongest channel that transmits the effect of energy price to GDP is value-added of industry and service sectors. The long run analysis rejects the existence of a long-run relationship between the energy subsidy reform and GDP. The findings indicate that the energy subsidy reform does not result in a reduction in energy consumption. These findings challenge the environmental aspect of the fossil fuel subsidy reforms as stand-alone policies without major reforms in the energy efficiency of economic sectors.
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