The Effects of Oil Revenue Shocks on Health Expenditures in Iran

Oil plays an important role in the Iranian economy. Thus it is necessary to study of the effect of changes in oil revenues on other sectors of the economy. The paper investigates the dynamic effects of oil shocks on government health spending during the1979-2010periods. To study the effects of oil price shocks on the Iranian government expenditure in the health sector the vector autoregressive model (VAR) and impulse response functions are used. The selection of model variables was based on economic common theories and the Akaike criterion was used to determine the optimal number of lags in the model. The Engel-Granger test confirmed the existence of a long-term equilibrium relationship between oil revenues and health spending. Also, the impulse response functions showed that a positive shock equaling one standard deviation in Iran's oil revenue would increase the government health expenditure for 8 consecutive periods, then decreases, and finally, after16periods become negative. In Iran, health expenditures are largely influenced by the country's oil revenues, so that a rise in the country’s oil revenue leads to an increase in health expenditures for a relatively long period of time.