The Effects of Foreign Trade Liberalization on Government Expenditure and Private Consumption In IRAN (Optimal Control Method)

Using the Optimum control procedure, the present paper is concerned
with the effects of trade liberalization on both government and private
expenditures in Iran.
An appropriate analytical consisting of ten equations is specified throgh
which significant estimation results are obtained, using econometric
method over the 1959-86 period. The model is utilized to explore how any
change in control variables such as the overage rate of tariffs, government
revenues and money supply can affect the optimally controled path of
state variables like private expenditures, government budget, and GDP.
The results obtained, 012 the one hand, reveal the fact that the policy of
trade liberalization (such as a reduction in tariffs) reduces government
spendings (or reduces government budget deficit), but it is not likely to lead
to a possible budget balance. This is because liberalization generally lowers
government revenues as well. On the other hand, although a reduction in
tariffs may result in a gap between real and expected valuse of private
expenditures in the short-ron, this gap is likely to disappear in the long-run