Shahryar Zaroki; Sahar Nasrnejad Nesheli; Niloufar Gorgani Firoozjah
Abstract
In any society, the focus of statesmen, policymakers, and researchers on poverty reduction and enhancing economic welfare is necessary. Given that most government economic policies affect relative prices and their fluctuations, which in turn impact welfare, analyzing the welfare effects caused ...
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In any society, the focus of statesmen, policymakers, and researchers on poverty reduction and enhancing economic welfare is necessary. Given that most government economic policies affect relative prices and their fluctuations, which in turn impact welfare, analyzing the welfare effects caused by price changes in different product groups seems necessary The aim of this study is to investigate the role of inflation of different commodity groups on Iran's economic welfare from 1972 to 2021. The research model is estimated using Autoregressive Distributed Lag (ARDL) approach. Economic welfare is measured using a composite index of well-being. The trend of the well-being index fluctuated during the study period reaching its peak in 1975 and its minimum in 1990. The long-term results of the estimation of the research model reveal several key findings:
First, total inflation and inflation of different groups of goods have an unfavorable effect on economic well-being.
Second, among different product groups, inflation in the housing, fuel, and lighting group has the most adverse effect on economic welfare.
Third, considering that the share and weight of the group of food, beverages and tobacco in the consumption basket of households is larger than other groups of goods, but the size of the effect of inflation of this group of goods on economic welfare is in the fourth place. Fourth, the increase in the inflation of the health and treatment group has the least adverse effect on economic welfare. Another finding is that per capita income and economic growth have a favorable effect on economic welfare. According to the obtained results, the government should take measures such as adopting appropriate measures in line with monetary discipline and preventing the irrational increase of monetary variables in accordance with inflation targeting to control inflation in order to improve welfare.
Introduction
The provision of economic welfare across different segments of society is a key concern for politicians in the country. Article 43 of the Constitution aims to ensure the independence of society, eradicate poverty and deprivation, and fulfill the basic needs of individuals as they progress, including housing, food, clothing, health, education, and the necessary facilities for family formation, along with providing working conditions and opportunities for full employment. To attain a comprehensive understanding of welfare and how to measure it, it is crucial to clarify the concept itself. Identifying the impact of various sectors such as housing, education, nutrition, health, and treatment on changes in welfare is essential. This allows for prioritizing efforts in each of these fields to enhance societal welfare, growth, and development. Monroe asserts that the primary objective of a society is to allocate resources among its members to maximize their welfare. Achieving this goal involves allocating resources in a manner that generates the highest overall income for society. In a free market economy, this allocation is typically accomplished through prices, which play a crucial role in determining changes in household welfare. Inflation and its fluctuations should be recognized as significant factors affecting welfare. Understanding the relationship between inflation and welfare enables policymakers to implement effective measures to mitigate its adverse effects and promote overall societal well-being.
Method
The Index of Economic Well-Being (IEWB) serves as a comprehensive and inclusive measure utilized in the current research to assess economic welfare. This index encompasses various dimensions that contribute to overall well-being, including:effective per capita consumption flow, net social accumulation of reserves and wealth-generating resources, economic inequality and economic insecurity. Each dimension is assigned weights in a specific manner, reflecting their relative importance. Consequently, the weights allocated to each dimension may vary across different observations. (Ozberg and Sharp, 2009). The general form of this index is as follows:
The value of the economic welfare index is measured by four components, which are consumption flow (CF), productive asset balance (WS), individual income distribution (ID), and economic security level (ES) (Bakhtiari et al., 2013). In this research, the base year of 2015 was used to validate the variables.
In the following, in order to investigate the effect of inflation of the total basket and different groups of goods on economic well-being, the autoregressive approach with distribution breaks (ARDL) has been used. First, the research model is specified with the aim of explaining the effect of inflation in the total basket of goods and services on economic welfare. Then, with the aim of analyzing the effect of inflation in different commodity groups, the research model will be presented. So in these two specifications of the IEWB research model, economic welfare is expressed as a dependent variable, which is calculated with the combined index of welfare. Inf inflation of the entire basket of goods and services, inflation for each of the 7 product groups [including 1. Health and treatment group (Health), 2. Clothing and footwear group (Cloth), 3. Furniture, accessories and Services used at home (Furniture), 4. Food, beverages and tobacco group (Food), 5. Recreation, education, hotel and restaurant group (ECERH), 6. Transportation and communication group (Transport) 7. Housing, fuel and lighting group, RGDPPC per capita real GDP, EG is economic growth.
Based on the above model, it is possible to test the effect of inflation in the mentioned 7 groups on the welfare of Iran's economy in the short ـ term and long ـ term situation.
Result and Discussion
In the material dimension of welfare, people should have a balanced life that includes employment and sufficient income to meet their basic needs. However, in many societies, includingIran, inflation and the instability of real purchasing power often pose challenges to people's ability to maintain material welfare. This can directly impact household consumption patterns and overall economic welfare. Therefore, understanding the effects of inflation on economic welfare is crucial. Considering the necessity of explaining the effect of inflation on economic welfare in Iran, in the present study, an attempt was made to analyze the effect of inflation of total goods and services and inflation of different groups of goods on economic welfare. For this purpose, while calculating the economic welfare with the composite index of welfare in the period of 1973 ـ 2022, the research model was estimated with the autoregression approach with distribution breaks. Our findings reveal a fluctuating trend in Iran's economic welfare during the study period. Following an initial increasing trend, economic welfare experienced a decreasing trend from 1976 until the end of the war. It increased again after the war, but decreased again in the post ـ war period.
The maximum value of the welfare index with the value of 69.6 belongs to the year 1354 and the lowest value of the welfare index with the value of 1.16 belongs to the year 1991. The results of the model estimation in 8 different estimations indicate the existence of a negative effect of inflation (total and basket of goods) on economic welfare. Based on this, the comparative results in the long term indicate that firstly, the inflation of all goods and services and the inflation of different commodity groups have an adverse effect on welfare. Second, among the 7 product groups, the inflation of the housing, fuel, and lighting group has had the most adverse effect on economic welfare. Also, due to the fact that the share and weight of the group of food, beverages, and tobacco in the consumption basket of households is larger than other groups, but the size of the inflation effect of this group of goods on welfare is in the fourth place. The increase in the inflation of the health and treatment group has the least adverse effect on economic welfare. Per capita income and economic growth also have a favorable effect on welfare, as expected.
