Explaining Large Inventories: The Case of Iran

Middle Eastern Finance and Economics, Vol. 1, No. 1, pp. 21-34, 2007

Posted: 22 Sep 2007

See all articles by Anton Dobronogov

Anton Dobronogov

World Bank

Ahmad R. Jalali-Naini

Institute for Management and Planning Studies

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According to the national accounts of Iran, during the period of 1988-2003 the annual change in inventories in this economy was highly variable and averaged 7.3 percent of GDP if calculated at current prices. In an ideal economy with no distortions, change in inventories should be zero on average for a sufficiently large period. Because of inefficiencies and statistical errors, in developing countries it typically falls in a range between one and two percent of GDP. The figure for Iran exceeds not only this range, but also economy's real GDP growth, which averaged 4.3 percent for this period. In this paper we argue that variation in the change in inventories in Iran could be explained by a number of system characteristics of the Iranian economy, including: impact of cost of capital effect and supply shocks expectations in a context of high dependency on the oil revenues and imports of capital/intermediary goods; periodical softening and hardening of budget constraints of the public enterprises; variations in statistical errors related to differentials between PPI and CPI inflation; and possibly shifting financial constraints which may bind on private purchases of goods and services. Further, there is evidence to suggest that high average change in inventories could be explained by capital flight hidden in the imports statistics, by wasting some of the over accumulated inventories under the soft budget constraint, and by statistical errors and omissions.

Keywords: inventories, Iran, cost of capital, supply shock, soft budget constraint, capital flight

JEL Classification: D21, E22, O47, P44

Suggested Citation

Dobronogov, Anton and Jalali-Naini, Ahmad Reza, Explaining Large Inventories: The Case of Iran. Middle Eastern Finance and Economics, Vol. 1, No. 1, pp. 21-34, 2007, Available at SSRN: https://ssrn.com/abstract=1016226

Anton Dobronogov (Contact Author)

World Bank ( email )

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Ahmad Reza Jalali-Naini

Institute for Management and Planning Studies ( email )

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