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Title

THE EFFECT OF OIL PRICE VOLATILITY ON GDP IN IRAN

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 Start Page 1 | End Page 31

Abstract

 The main purpose of this study is to investigate the impact of OIL PRICE VOLATILITY on gross domestic product (GDP) in IRAN for the period of 1987-2006 using seasonal data. We first calculate an index for variability of oil prices using the GARCH MODEL. We then study the relationships amongst variables of the model using vector auto-regression and the long-run relationship amongst the variables using the Johansen-Juselius co-integration method. Based on Impulse Response Functions, variability of oil prices has a negative impact on GDP and leads to lower levels of GDP than would be expected otherwise throughout the study period. The estimated long-run relationships indicate a significant positive impact of private consumption expenditure, investment and net exports on GDP, consistent with the theoretical basis of the study. Total government expenditure, contrary to expectations, has a negative impact on GDP. This result is understandable given the low efficiency of the government sector in IRAN and the negative influence of OIL PRICE VOLATILITY on government expenditures. In the long-run, oil prices have a positive impact on GDP while their volatility has a negative impact. Given the strong dependence of the IRANian economy on oil and oil income, these results are acceptable.

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