Assessing the Dynamics between Oil Revenue and Non-Oil GDP with an Emphasis on the Concept of Investment Inefficiency; Application of BVAR Model

The main objective of this study was to investigate the relationship between oil revenue, effective government capital spending and non-oil GDP in Iran in the 1990: Q1 to 2017: Q1 in the context of a BVAR model with main feature such as public investment inefficiencies in development objectives. In this regard a Bayesian Vector Auto Regressive (BVAR) Model was applied and Normal- Wishart in Prior Density Function selected by RMSE and Theil indices and impulse functions (IRF) in response to stochastic shocks was analyzed. Results from IRFs revealed oil revenue and non-oil GDP shocks tend to government capital spending slightly increase. Base as usual trends, public spending as foundation of development plan has not significant situation. The findings show that, with positive shocks in effective government spending, GDP without oil under all three scenarios increases, while the largest increase in non-oil GDP under the optimistic scenario corresponding to the lowest level of investment inefficiency. Results from IRFs revealed because of the structure of the economy that was largely unproductive and Dutch Disease phenomenon, the oil revenue increment has inverse effect on the growth of non-oil producing sector, and so on oil revenues not able to play an incentive and running role to non-oil GDP growth and overall national production.