Oil Exports and the Iranian Economy

49 Pages Posted: 23 May 2011 Last revised: 26 May 2011

See all articles by Hadi Salehi Esfahani

Hadi Salehi Esfahani

University of Illinois at Urbana-Champaign

Kamiar Mohaddes

University of Cambridge - Judge Business School; University of Cambridge - King's College, Cambridge

M. Hashem Pesaran

University of Southern California - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: December 13, 2010

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. Finally, we consider the experience of other major oil exporting economies and show that the long-run output equation derived in the paper applies equally to Saudi Arabia and Norway, two oil exporters with very different development experiences and political systems.

Keywords: Growth models, long run relations, Iranian economy, Saudi Arabia, Norway, oil price and foreign output shocks, and error correcting relations

JEL Classification: C32, C53, E17, F43, F47, Q32

Suggested Citation

Esfahani, Hadi Salehi and Mohaddes, Kamiar and Pesaran, M. Hashem, Oil Exports and the Iranian Economy (December 13, 2010). Available at SSRN: https://ssrn.com/abstract=1849563 or http://dx.doi.org/10.2139/ssrn.1849563

Hadi Salehi Esfahani

University of Illinois at Urbana-Champaign ( email )

Department of Economics
1206 South Sixth Street, 210DKH
Champaign, IL 61820
United States
217-333-2681 (Phone)
217-333-1398 (Fax)

Kamiar Mohaddes (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

University of Cambridge - King's College, Cambridge ( email )

King's Parade
Cambridge, CB2 1ST
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

M. Hashem Pesaran

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

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