Analysing the effects of oil price shocks on government expenditure in the Iranian economy

Abstract

The Iranian economy is closely associated with the oil industry as a key player in the global oil market. Accordingly, oil price spikes have a major influence on government spending with oil revenues being a major source for financing different expenditure categories such as social security, education, arts and culture, and health care. Moreover, recently there have been economic sanctions imposed on Iran owing to the nuclear program which has greatly restricted Iranian oil exports and caused significant distress to government revenue which in turn has spill over effects on Iran's allocations for investment in the energy industry, and more importantly in government spending on care, education, culture and arts, and social security. This paper aims to analyse these overall effects and the impact of oil price spikes on Iranian government expenditure. In order to achieve our objective we rely on a VAR econometric model using data from 1965-2011. The results show that Iranian government social spending does not appear to be significantly affected by oil price shocks.

The Dynamic Impact Among Oil Dependence Volatility, the Quality of Political Institutions, and Government Spending

“…As shown in the literature review section, government spending is heavily dependent on the oil sector in oil exporting countries, (some indicative studies include Dées et al, 2008;Farzanegan and Markwardt, 2009;Hamdi and Sbia, 2013). Therefore, the government spending behaviour can be significantly changed based on any change in oil prices and associated increase or decrease in oil price volatility (Fasano-Filho and Wang, 2002;Bondzie et al, 2014;Pazouki and Pazouki, 2014). Fig.…”

Oil Prices Shocks and Government Expenditure

“…There is a weak evidence for the reverse causality. Pazouki and Pazouki (2014) investigated the effect of oil price shocks in the government expenditure in the Iranian economy over the period from 1965 to 2011 using a vector autoregressive model. The main findings of this study indicate that fluctuations in oil prices have a significant impact on public expenditure as oil revenues are considered to be the source of finance for different types of government expenditure such as social security, employment, and health care.…”