Trade Balance and Income Shocks: Experience of Iran

Iran is one of the oil exporter countries that the major part of its income is revenue of the oil. Trade balance in Iran was fluctuating too much in the past decade. This paper investigates the major sources of changes in the trade balance of Iran with an emphasis on the difference between permanent and transitory disturbances to income. Applying Blanchard-Quah technique, we classified income shocks in two groups, permanent shocks and transitory shocks and we have investigated the impacts of these shocks on the trade balance. The findings support the hypothesis that transitory disturbances to income are the main determinants of changes in the trade balance. These results seem to be fairly consistent with inter-temporal models of trade balance, which demonstrate transitory shocks to income as the main source of variations in the trade balance. These results do not seem to support the idea that productivity shocks alone generate most of the variation in the trade balance.