Oil Price Shocks and Dutch Disease: The Case of Iran

Abstract

Applying the SVAR method of 'Kilian' to the monthly data over the period of 1973-2007, in this paper, we decompose oil price shocks into five structural shocks, namely, Iran political supply shocks, OPEC political supply shocks, non- OPEC supply shocks, world demand shocks, and oil specific demand shocks. Then, estimating separate OLS regressions, based on annual data of Iranian Economy, the impact of these structural shocks on main macroeconomic variables, and outbreak of Dutch disease is studied. This paper finds that the symptoms of Dutch disease have not been observed, following different structural shocks, except for Iran political supply shocks. Owing to dominant role of government in production, and export of oil in Iran, it is evident that the effect of oil price shocks, to a large extent depends on the government conduct, and the Dutch disease is not an inevitable reality for the Iranian economy.

Keywords

• oil price shocks
• svar
• dutch disease
• real exchange rate
• tradables and nontradables