Investigating Dynamic Effects of Structural Shocks in Global Oil Market on Iran’s Public and Private Sector Expenditure: Structural Dynamic Model Approach

Following oil price shocks, “Expenditure Effect” is one of the most important and influential channel affecting the oil exporting economies. The magnitude of the structural shock effects on oil exporting economies depends on the type of the shock and government expenditure in the economy. In this study, using quarterly data from 1988 to 2014 of Iranian economy and global oil market, first, in line with kilian (2009), supply and demand shocks are disentangled and identified and then, using a dynamic factor model (with the Bayesian approach), which is unlike the standard autoregressive models not suffered from the reduction of degree of freedom due to inclusion of new variable, the impacts of oil price shocks on relevant expenditure variables are investigated. The findings indicate that the response of public and private expenditure variables to the structural shocks in the global oil market is different. The positive global real activity shock affects domestic economy through two channels, an increase in oil revenues, and a boom in the domestic economy which increases private consumption, including durable and non-durable goods, services, total import, and total investment. The effect of this shock on public consumption is instantaneously negative and it becomes statistically insignificant after one period. Since the impacts of oil market-specific shock only increase oil revenues, it affects public consumption positively and statistically significant but do not affect private consumption and total investment. The effect of this shock on total import is instantaneously positive although it dies out after one period.