The effects of oil shocks on government expenditures and government revenues nexus in Iran (as a developing oil-export based economy)
AbstractThe main purpose of this study is to investigate the dynamic relationship between government revenues and government expenditures in Iran as a developing oil export based economy. Moreover, I want to know how government expenditures and revenues respond to oil price (revenue) shocks. I use two different groups of the variables with two different time periods (quarterly and annually) to investigate the robustness and reliability of the results and to provide a more comprehensive base for comparison against different methodologies. For the first group of the variables (including oil price, oil revenues to GDP ratio, government total expenditures to GDP ratio and a dummy variable for capturing the effects of war with Iraq) I apply an SVAR model using annual data for the period 1970-2008. The results of the impulse response functions and variance decomposition analysis indicate that the causality is running from oil revenues to GDP ratio to government total expenditures to GDP ratio. Moreover the contribution of oil revenue shocks in explaining the government expenditures to GDP ratio is stronger than the contribution of oil price shocks. For the second group of the variables (oil revenues, government total revenues, government current expenditures, government capital expenditures, money supply and CPI) unrestricted VAR and VEC models have been applied using quarterly data for the period 1990:2-2009:1. The results of the impulse response functions and variance decompositions analysis for both VAR and VEC models indicate that the strong causality is running from government revenues to government expenditures (both current and capital) in Iranian economy while the evidence for the reverse causality is very weak. The results show that in the VEC model which the long-run behavior of endogenous variables is restricted to converge to their co-integration relationships, oil revenue shocks can affect the other macroeconomic variables more directly while in the VAR model this changes and works through the total revenues channel. Moreover the findings indicate that government revenues, government expenditures and money supply are important determinants of domestic price level in Iranian economy. Overall my results support the revenue-spending hypothesis for Iran. In this context Iran should enhance the effectiveness of fiscal policy by making budget expenditure less driven by revenue availability. This policy can help to avoid the costs and instability that variations in public spending generate mostly due to the fluctuations in oil revenues.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by International Institute of Social Studies of Erasmus University (ISS), The Hague in its series ISS Working Papers - General Series with number 540.
Date of creation: 10 May 2012
Date of revision:
Contact details of provider:
Web page: http://www.iss.nl/
government expenditures; sanctions; Iran; government revenues; oil shocks; vector autoregression (VAR);
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-05 (All new papers)
- NEP-ARA-2012-06-05 (MENA - Middle East & North Africa)
- NEP-CWA-2012-06-05 (Central & Western Asia)
- NEP-ENE-2012-06-05 (Energy Economics)
- NEP-MAC-2012-06-05 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- van Bergeijk, Peter A. G. & van Marrewijk, Charles, 1995. "Why do sanctions need time to work? Adjustment, learning and anticipation," Economic Modelling, Elsevier, vol. 12(2), pages 75-86, April.
- van Bergeijk, Peter A G, 1989. "Success and Failure of Economic Sanctions," Kyklos, Wiley Blackwell, vol. 42(3), pages 385-404.
- Eita, Joel Hinaunye & Mbazima, Daisy, 2008. "The Causal Relationship Between Government Revenue and Expenditure in Namibia," MPRA Paper 9154, University Library of Munich, Germany.
- van Marrewijk, Charles & van Bergeijk, Peter A. G., 1993. "Endogenous trade uncertainty : Why countries may specialize against comparative advantage," Regional Science and Urban Economics, Elsevier, vol. 23(5), pages 681-694, November.
- Abeysinghe, Tilak, 2001. "Estimation of direct and indirect impact of oil price on growth," Economics Letters, Elsevier, vol. 73(2), pages 147-153, November.
- Farzanegan, Mohammad Reza, 2011. "Oil revenue shocks and government spending behavior in Iran," Energy Economics, Elsevier, vol. 33(6), pages 1055-1069.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lidwien Lamboo).
If references are entirely missing, you can add them using this form.