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Oil Exports and the Iranian Economy

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  • Esfahani, Hadi Salehi

    ()
    (University of Illinois at Urbana-Champaign)

  • Mohaddes, Kamiar

    (University of Cambridge)

  • Pesaran, M. Hashem

    ()
    (University of Cambridge)

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 "resource 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 coefficient equal to the share of capital. The long run theory is tested using a new quarterly data set on the Iranian 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 inefficiencies. 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4537.

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Length: 45 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4537

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

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References

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Citations

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Cited by:
  1. Mehdi Raissi & Kamiar Mohaddes, 2011. "Oil Prices, External Income, and Growth," IMF Working Papers, International Monetary Fund 11/291, International Monetary Fund.
  2. Cavalcanti, Tiago V. de V. & Mohaddes, Kamiar & Raissi, Mehdi, 2011. "Growth, development and natural resources: New evidence using a heterogeneous panel analysis," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 51(4), pages 305-318.
  3. Somayeh Mardaneh, 2012. "Inflation Dynamics in a Dutch Disease Economy," Discussion Papers in Economics, Department of Economics, University of Leicester 12/25, Department of Economics, University of Leicester.
  4. Cavalcanti, T.V.de V. & Mohaddes, K. & Raissi, M., 2011. "Commodity Price Volatility and the Sources of Growth," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1112, Faculty of Economics, University of Cambridge.
  5. 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.
  6. 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.
  7. Mohaddes, K. & Pesaran, M.H., 2013. "One Hundred Years of Oil Income and the Iranian Economy: A curse or a Blessing," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1302, Faculty of Economics, University of Cambridge.
  8. Dreger, Christian & Rahmani, Teymur, 2014. "The Impact of Oil Revenues on the Iranian Economy and the Gulf States," IZA Discussion Papers 8079, Institute for the Study of Labor (IZA).
  9. Mohaddes Kamiar & Raissi Mehdi, 2013. "Oil Prices, External Income, and Growth: Lessons from Jordan," Review of Middle East Economics and Finance, De Gruyter, De Gruyter, vol. 9(2), pages 99-131, August.
  10. 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.
  11. Mohammad Reza Farzanegan, 2012. "Does the Iranian oil supply matter for the oil prices?," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201232, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  12. Cashin, P. & Mohaddes, K. & Raissi, M. & Raissi, M., 2012. "The Differential Effects of Oil Demand and Supply Shocks on the Global Economy," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1249, Faculty of Economics, University of Cambridge.

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