The Role of Oil Price Shocks in Business Cycles in Iran's Economy

Existing literature on the role of oil price fluctuations has mainly focused on the importer countries and few attempts have been done to analyze the impact of the variability on the oil revenues from the oil producing countrie's point of view. So in this study, the role of oil price shocks in shaping the fluctuations in Iran's economy by using the seasonal data from 1971– 2003 have analyzed. To this end, at first we should recognize the business cycles in Iran's economy, then by using selective statistical indicators, cyclical behavior of effective key variables on business cycles is computed and analyzed. At the second step, a business cycle model using Vector Auto regression (VAR) is specified and the effects of oil price shocks are analyzed. The results of the research have shown that economy of Iran has experienced seven business cycles and oil factor among other effective factors has played an important role on causing booms and recessions. The result of estimation on VAR model and evaluating the impact of several shocks on production fluctuations indicates that oil price shocks have a long run impact on business cycles in Iran's economy and this effect decreases slowly during the time. In addition, this shocks account for %25 of the production fluctuations. While the instability share of other variables of the model on the production are worthless.