The Effects of Oil Price Volatility on Iran’s Economic Growth through Some Institutional, Monetary and Financial Variables

Abstract In Iran, oil supplies the needed fuel and is the main source of foreign exchange earnings. Thereby, any volatility in oil prices will affect Iran's foreign exchange earnings at first and economic growth through time. This study, using Structural Vector Auto Regression (SVAR) model, investigates the effects of oil price volatility on economic growth of Iran through some institutional, monetary and financial variables during the period 1981-2017. The results show that the impulse of oil price volatility has a negative reaction from the growth of production. The index of democracy's reaction to the oil volatility is negative and, given its direct relation to production growth, overall production growth is reduced. Similarly, as for the government expenditures, it leads to reduced production growth. But the M2 has a positive reaction to the volatility of world crude oil prices and also has a positive effect on the production growth in the short run. The results also show that the most important variable affecting production growth changes in both the short and long run is the impact of government expenditures changes. Then, for achieving sustainable growth and using private sector dynamics, the assignment of public sector companies to the private sector based on the Article 44 of the Constitution should be followed.