The Impact of Trade Openness on Main Macroeconomic Variables in Iran (1961-2007)

Using a vector autoregressive (VAR) model and an impulse response analysis, this paper investigates the impact of trade openness on main macroeconomic variables including growth of output, inflation, and employment for the period 1961-2007 in Iran. More specifically, we intend to study how an increase in the degree of openness affects these main macroeconomic variables. The results of impulse response functions show that in the short run the trade openness increases the output growth but decreases the inflation rate. However, the short-run impact of openness on the growth of employment is negative. Moreover, the results show that a one unit change in the standard error of trade openness has no long-run effect on the output growth, the inflation and the growth of employment.