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Oil Exports and the Iranian Economy

  • Esfahani, Hadi Salehi

    ()

    (University of Illinois at Urbana-Champaign)

  • Mohaddes, Kamiar

    (University of Cambridge)

  • Pesaran, M. Hashem

    ()

    (University of Cambridge)

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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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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  2. Karim Abadir & Kaddour Hadri & Elias Tzavalis, . "The Influence of VAR Dimensions on Estimator Biases," Discussion Papers 96/14, Department of Economics, University of York.
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  19. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
  20. Binder, Michael & Pesaran, M Hashem, 1999. " Stochastic Growth Models and Their Econometric Implications," Journal of Economic Growth, Springer, vol. 4(2), pages 139-83, June.
  21. Christa N. Brunnschweiler & Erwin H. Bulte, 2006. "The Resource Curse Revisited and Revised: A Tale of Paradoxes and Red Herrings," CER-ETH Economics working paper series 06/61, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
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  31. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
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  35. Törbjörn I. Becker, 1999. "Common Trends and Structural Change; A Dynamic Macro Model for the Pre- and Postrevolution Islamic Republic of Iran," IMF Working Papers 99/82, International Monetary Fund.
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  37. Carlos Leite & Jens Weidmann, 1999. "Does Mother Nature Corrupt; Natural Resources, Corruption, and Economic Growth," IMF Working Papers 99/85, International Monetary Fund.
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