Threshold Effects of Oil Revenues on Iran’s Growth Regimes: A Hybrid Threshold Markov Switching Model

Abstract

One of the significant issues studied in the oil-exporting countries has been to identify the relationship between oil and economic growth, and the nature of the relationship has been important for the economic policymakers of these countries. This study aims to investigate the effect of oil revenues on Iran’s economic growth over the period 1971-2017. For this purpose, the threshold effects of oil revenues on economic growth regimes are modeled using a hybrid threshold Markov switching model. The results from the model estimation indicate that oil revenue has a nonlinear and threshold effect on Iran’s economic growth regimes in which as long as oil revenues have a share less than 16.3% in GDP, oil revenues have a positive effect on growth but after exceeding this threshold, oil rents had a negative and significant effect on economic growth. The results also imply that Iran’s economic growth has two regimes, namely the high-growth regime and low-growth regime, in which the fluctuations in the high-growth regime are more than that in the low-growth regime.