Investigating Dynamic Effects of Structural Shocks in Global Oil Market on Iran’s Public and Private Sector Expenditure: Structural Dynamic Model Approach
1
Ph.D. Candidate in Economics, Allame Tabataba’I University
2
Associate Professor of Economics, Allame Tabataba’I University
Abstract
Following oil price shocks, “Expenditure Effect” is one of the most important and influential channel affecting the oil exporting economies. The magnitude of the structural shock effects on oil exporting economies depends on the type of the shock and government expenditure in the economy. In this study, using quarterly data from 1988 to 2014 of Iranian economy and global oil market, first, in line with kilian (2009), supply and demand shocks are disentangled and identified and then, using a dynamic factor model (with the Bayesian approach), which is unlike the standard autoregressive models not suffered from the reduction of degree of freedom due to inclusion of new variable, the impacts of oil price shocks on relevant expenditure variables are investigated. The findings indicate that the response of public and private expenditure variables to the structural shocks in the global oil market is different. The positive global real activity shock affects domestic economy through two channels, an increase in oil revenues, and a boom in the domestic economy which increases private consumption, including durable and non-durable goods, services, total import, and total investment. The effect of this shock on public consumption is instantaneously negative and it becomes statistically insignificant after one period. Since the impacts of oil market-specific shock only increase oil revenues, it affects public consumption positively and statistically significant but do not affect private consumption and total investment. The effect of this shock on total import is instantaneously positive although it dies out after one period.
Arshadi, A, and Mossavi, H. (2014). Evaluation of asymmetric effects of oil shocks on economic growth of Iran (1971-2008). Journal of the Economic Research, 3(14), 179-200 (In Persian).
Aastveit, Kunt A. (2014). Oil price shocks in a data-rich environment. Eneergy Economics, 45, 268-279.
Bahrami, J, and Nasiri, S. (2011). Oil price shocks and Dutch disease: The case of Iran. Journal of Economic Research, 5(48), 25-54 (In Persian).
Bakhshi, L, Bahrami, J, and Mousavi, F. (2012). Comparative study of macroeconomic effects of oil shocks, before and after mid 80s: The case of oil exporting countries. Journal of Iranian Energy Economic, 1(4), 25-42 (In Persian).
Bernanke, B, and Boivin, J. (2003). Monetary Policy in a Data-Rich Environment. Journal of Monetary Economics,50 (3), 525–46.
Bernanke, B, Boivin, J, and Eliasz, P. (2005). Measuring the effects of monetary policy: A factor-augmented vector autoregressive (FAVAR) approach. Quarterly Journal of Economics, 120 (1), 387–422.
Boivin, J, and P. Giannoni, P. (2009). Global forces and monetary policy effectiveness. International Dimensions of Monetary Policy, edited by Jordi Gali and Mark Gertler, 429–78, Chicago: University of Chicago Press.
Cashin, P, Céspedes, L, and Sahay, R. (2004). Commodity currencies and the real exchange rate. Journal of Development Economics,75 (1), 239–68.
Cashin, P, Mohaddes, K, and Raissi, M. (2014). The differential effects of oil demand and supply shocks on the global economy. Journal of Energy Economics, 44, 113–134.
Charnavoki, V, and Dolado, J. (2014). The effects of global shocks on small commodity-exporting economies: Lessons from Canada. American Economic Journal,6(2), 207-237.
Corden, W. M, and Neary, J. P. (1982). Booming sector and de-Industrialisation in a small open economy. Economic Journal 92 (368), 825–48.
Corden, W. M. (1984). Booming sector and Dutch disease economics: Survey and consolidation. Oxford Economic Papers,36 (3), 359–80.
Edwards, E. and Aoki, M. (1983). Oil export boom and Dutch disease, Resource and Enegy, 5, 219-242.
Fallahi, F, Por-Abdollahian, K, Behboodi, D, and Mohseni Zanoozi, F. (2013). The asymmetric effects of oil revenue shocks on output in Iran using markov-switching approach. Journal of Iranian Energy Economic, 2(7). 103-127 (In Persian).
Hamilton, J D. (1985), Historical causes of postwar oil shocks and recessions. Energy Journal, 6(1), 97-116.
Hamilton, J D. (2003). What is an oil shock? Journal of Econometrics, 113(2), 363–398.
Khiabani, N, and Amiri, H, (2012). Designing a dynamic stochastic general equilibrium model of open economy to examine the impact of oil price shocks on macroeconomic variables. Journal of Quantitative Economics, 9 (3), 25-59 (In Persian).
Kilian, L. (2006). Exogenous oil supply shocks: how big are they and how much do they matter for the U.S. economy? Review of Economics and Statistics,90 (2), 216–40.
Kilian, L. (2009). Not all oil price shocks are alike: disentangling demand and supply shocks in the crude oil market. American Economic Review,99 (3), 1053–69.
Kilian, L, Rebucci, A, and Spatafora, N. (2009). Oil shocks and external balances. Journal of International Economics,77 (2), 181–94.
Koop, G, Poirier, D J, and Tobias J L. (2007). Bayesian econometric methods. New York City: Cambridge University Press.
Lian, A. Xiaoze, J, and Xiaomei, R. (2014). Are the macroeconomic effects of oil price shock symmetric? A factor-augmented vector autoregressive approach. Journal of Energy Economics, 45 (2014), 217-228.
Mehr-Ara, M, and Niki Oskooyi, K. (2006). Oil shock and its effect on macroeconomic variables. Iranian Journal of Trade Studies, 10(40), 1-32 (In Persian).
Mehrgan, N, Daneshkhah, A, Chatrabgoun, O, Ahmadi, R, and Tishekani, F. (2014). Examine Dutch disease phenomena and oil shock influence on the Iran's macroeconomic variables by copula approach. Journal of Economic Research (Tahghighat-e-Eghtesadi), 2(49), 411-428 (In Persian).
Mumtaz, H, and Surico, P. (2009). The transmission of international shocks: A factor-augmented VAR Approach. Journal of Money, Credit and Banking,41 (S1), 71–100.
Spatafora, N, and Warner, A. (1999). Macroeconomic and sectoral effects of terms-of-trade shocks: the experience of the oil-exporting developing countries. International MonetaryFund (IMF), Working Paper, 99/134.
Stock, J H, and Watson, M W. (2002). Implications of dynamic factor models for VAR analysis. National Bureau of Economic Research (NBER),Working Paper 11467.
Yudong, W, Chongfeng, W, and Li, Y. (2014). Oil price shocks and agricultural commodity prices. Energy Economics, 44, 22–35.
Yu-chin, C, and Rogoff, K. (2003). Commodity currencies. Journal of International Economics, 60 (1), 133–60.
Memarzadeh, A., & Khiabani, N. (2017). Investigating Dynamic Effects of Structural Shocks in Global Oil Market on Iran’s Public and Private Sector Expenditure: Structural Dynamic Model Approach. Quarterly Journal of Applied Theories of Economics, 4(2), 169-194.
MLA
Abbas Memarzadeh; Nasser Khiabani. "Investigating Dynamic Effects of Structural Shocks in Global Oil Market on Iran’s Public and Private Sector Expenditure: Structural Dynamic Model Approach". Quarterly Journal of Applied Theories of Economics, 4, 2, 2017, 169-194.
HARVARD
Memarzadeh, A., Khiabani, N. (2017). 'Investigating Dynamic Effects of Structural Shocks in Global Oil Market on Iran’s Public and Private Sector Expenditure: Structural Dynamic Model Approach', Quarterly Journal of Applied Theories of Economics, 4(2), pp. 169-194.
VANCOUVER
Memarzadeh, A., Khiabani, N. Investigating Dynamic Effects of Structural Shocks in Global Oil Market on Iran’s Public and Private Sector Expenditure: Structural Dynamic Model Approach. Quarterly Journal of Applied Theories of Economics, 2017; 4(2): 169-194.
)