Evaluating the Effects of Oil Revenues Fluctuations on Core Inflation in Iran (1338-1388)

The oil revenue in terms of its situation in the GDP and its share in the budget and foreign exchange resources of the Iranian economy is very important. The dependence of government budget to oil revenue and its fluctuations is pointed out by many researchers as the main cause of inflation. The effect of fluctuations in oil revenues on core inflation is evaluated using VARX approach. Results show that, besides a significant positive effect of the permanent (smoothed or long-run) component, there is also a significant positive effect of cyclical component of oil revenues on core inflation. Subsequently, if the government purchases only the smoothed part of oil revenue and discard the transitory part, the core inflation could be significantly reduced.