OIL REVENUES AND ECONOMIC GROWTH IN IRAN

This paper examines the nonlinear or asymmetric relationship between oil revenues and output growth in a typical oil-exporting country, Iran. We apply the Gregory-Hansen (1996) cointegration technique, allowing for the presence of potential structural breaks in data, to empirically examine the long-run co-movement as well as short run error correction mechanism (ECM) between output and oil revenues. The main results ofthe paper confirm the stylized facts that in heavily oil-dependent countries lacking the institutional mechanisms de-linking fiscal expenditure from current revenue, oil revenue shocks tend to affect the output in asymmetric and nonlinear ways. The findings suggest that output growth is adversely affected by the negative oil shocks, while oil booms or the positive oil shocks play a limited role in stimulating economic growth. The findings have practical policy implications for decision makers in the area of macroeconomic planning. The use of stabilization and savings funds and diversification of the real sector seems crucial to minimize the harmful effects of oil booms and busts.