The Short-term and Long-run Effects of Oil revenue fluctuations on Iran's trade balance with using the vector error correction model (VECM) approach

Abstract

The direct impact of oil price and oil income fluctuations on government budgets and economy have been the general characteristics of oil exporting countries in recent decades. In Iran, the vast majority of government revenues are oil revenues. One of the main factors behind the volatility of oil revenues and trade balance in recent years has been economic sanctions. Given the importance of achieving the goals of internal and external economy stability in economic planning, in this study using a Vector Auto Regression (VAR) to investigate the effects of long-term fluctuations in oil revenues (The Hodrick-Prescott filter has been used to extract the cyclical component (fluctuating) of oil revenues) on the level of GDP and trade balance (respectively, as internal and external stability index) during the period 1992 to 2019 has been tested. The long-term relationship estimates indicate a negative relationship between oil revenue fluctuations and trade balance. The Vector Error Correction Model (VECM) has also been used to link the short-run volatility of variables to their long-run equilibrium values. The results of the long-term relationship estimation indicated that there is a significant relationship between the three trade balance and GDP and oil revenue fluctuations.

Findings of the shock-response function also show that a sudden shock in the endogenous variables of the research increases the level of trade balance and this effect gradually decreases over time. On the other hand, the effect of the sudden shock of GDP changes indicates that this variable in the short run has a inverse relation and in the long run, has a direct with the trade balance.