Analyzing Non-Linear Effects of Oil Price Volatilities on Iran's Macroeconomic Variables, with Emphasis on Industry and Mine Sector (An Application of State- Space Model)

With due attention to distinguished role of oil in Iran’s economy, it is important to analyze oil market shocks on Iran’s economy. Based on various studies results and because of eliminated variables bias in VAR models, valuation of impulse response functions led to wrong results; such as price dilemma problem in empirical literature. In this paper, for more exact analyzing the effects of oil income growth shocks on Iran’s economy, we substitute VAR model with constant coefficients by TVP-VAR models during 1988 - 2012 period. So, variables such as industry and mine value added, informal exchange rate, inflation rate, government’s real consumption expenditures growth, real imports growth, real oil income growth and oil market shocks are used in the model. The results show that the relation between variables is time variant and depends on economic situation. Furthermore, real oil revenues shocks have positive effects on real imports and governments real expenditures costs. Beside this, these shocks have negative effects on industry and mine value added and it could be a sign of Dutch disease, and it is not a suitable condition for an economic. So the policy makers should choose a consistent substitute for oil revenues such as tax revenues and policies.