Effect of Exogenous Oil Revenue Shocks on Reallocation of Public and Private Investments in Iran

Abstract

Determining the mechanism of oil shock effects on macroeconomic variables of oil-producing countries and incorporating these effects into the models that predict such variables is of utmost importance for the fiscal policy makers attempting to adopt appropriate policies to counter the shock induced volatilities. In this study, a dynamic stochastic general equilibrium (DSGE) model based on the real business cycle (RBC) theory is used to investigate the effect of oil revenue shocks on reallocation of private and public investment and the presence of resource curse in Iran's economy over the period 1974-2012. For this purpose, after estimating the model parameters and conducting a simulation, variables' impulse response to shocks are plotted and analyzed. The results demonstrate the negative effects of positive oil shock on private sector, a substitution relation between public and private investment, and the presence of resource curse during this period of Iran's economy.Keywords: real business cycle, oil shock, substitution relation, resource curse.JEL Classifications: F44, O13, Q13