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Oil Exports and the Iranian Economy

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  • Esfahani, H.S.
  • Mohaddes, K.
  • Pesaran, M.H.

Abstract

This paper develops a long run growth model for a major oil exporting economy and derives conditions under which oil revenues are likely to have a lasting impact. This approach contrasts with the standard literature on the "Dutch disease" and the "re- source curse", which primarily focus on short run implications of a temporary resource discovery. Under certain regularity conditions and assuming a Cobb Douglas production function, it is shown that (log) oil exports enter the long run output equation with a coeficient equal to the share of capital. The long run theory is tested using a new quarterly data set on the Iranain economy over the period 1979Q1-2006Q4. Building an error correction specification in real output, real money balances, inflation, real exchange rate, oil exports, and foreign real output, the paper finds clear evidence for two long run relations: an output equation as predicted by the theory and a standard real money demand equation with inflation acting as a proxy for the (missing) market interest rate. Real output in the long run is shaped by oil exports through their impact on capital accumulation, and the foreign output as the main channel of technological transfer. The results also show a significant negative long run association between inflation and real GDP, which is suggestive of economic ineficiencies. Once the effects of oil exports are taken into account, the estimates support output growth convergence between Iran and the rest of the world. We also find that the Iranian economy adjusts quite quickly to the shocks in foreign output and oil exports, which could be partly due to the relatively underdeveloped nature of Iran's financial markets.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0944.

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Date of creation: 15 Oct 2009
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Handle: RePEc:cam:camdae:0944

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Web page: http://www.econ.cam.ac.uk/index.htm

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Keywords: Growth models; long run relations; Iranian economy; oil price and foreign output shocks; and error correcting relations;

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Citations

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Cited by:
  1. Cashin, P. & Mohaddes, K. & Raissi, M., 2012. "The Global Impact of the Systemic Economies and MENA Business Cycles," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1250, Faculty of Economics, University of Cambridge.
  2. Kamiar Mohaddes & M. Hashem Pesaran, 2013. "One Hundred Years of Oil Income and the Iranian Economy: A Curse or a Blessing?," CESifo Working Paper Series 4118, CESifo Group Munich.
  3. International Monetary Fund, 2012. "Commodity Price Volatility and the Sources of Growth," IMF Working Papers 12/12, International Monetary Fund.
  4. Dizaji, S.F., 2012. "Exports, government size and economic growth (Evidence from Iran as a developing oil-export based economy)," ISS Working Papers - General Series, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague 535, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
  5. Somayeh Mardaneh, 2012. "Inflation Dynamics in a Dutch Disease Economy," Discussion Papers in Economics 12/25, Department of Economics, University of Leicester.
  6. Farzanegan, Mohammad Reza, 2012. "Does the Iranian oil supply matter for the oil prices?," MPRA Paper 36030, University Library of Munich, Germany.
  7. Cavalcanti, T.V.V. & Mohaddes, K. & Raissi, M., 2009. "Growth, Development and Natural Resources: New Evidence Using a Heterogeneous Panel Analysis," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0946, Faculty of Economics, University of Cambridge.
  8. Mohaddes, K. & Raissi, M., 2011. "Oil Prices, External Income, and Growth: Lessons from Jordan," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1164, Faculty of Economics, University of Cambridge.
  9. Leong, W. & Mohaddes, K., 2011. "Institutions and the Volatility Curse," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1145, Faculty of Economics, University of Cambridge.
  10. Christian Dreger & Teymur Rahmani, 2014. "The Impact of Oil Revenues on the Iranian Economy and the Gulf States," Discussion Papers of DIW Berlin 1369, DIW Berlin, German Institute for Economic Research.
  11. Paul Cashin & Kamiar Mohaddes & Mehdi Raissi & Maziar Raissi, 2012. "The Differential Effects of Oil Demand and Supply Shocks on the Global Economy," IMF Working Papers 12/253, International Monetary Fund.
  12. Mehdi Raissi & Kamiar Mohaddes, 2011. "Oil Prices, External Income, and Growth," IMF Working Papers 11/291, International Monetary Fund.

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