Abstract
This study employed annual time series data (1960- 2003) and unit root tests with multiple breaks to determine the most likely times of struct ural breaks in major factors impacting on the trade - GDP nexus in Iran We found, inter alia , that the endogenously determined structural break s coincided with important events in the Iranian economy, inclu ding the 1979 Islamic revolution and the outbreak of the Iraq-Iran war in 1980. By applying the Lumsd aine and Papell (1997) approach, the stationarity of the variable under investigation was examined an d in the presence of structural breaks, we found that the null hypothesis of unit root could be reje cted for all of the variables under analysis except one. Under such circumstances, applying the ARDL procedure was the best way of determining long run relationships. For this reason, the error correctio n version of the autoregressive distributed lag procedure (ARDL) was then employed to specify the short and long-term determinants of economic growth in the presence of structural breaks. The r esults showed that while the effects of gross capit al formation and oil exports were important for the ex pansion of the Iranian GDP over the sample period, non-oil exports and human capital were generally le ss pivotal. It was also found that the speed of adjustment in the estimated models is relatively hi gh and had the expected significant and negative sign. JEL classification numbers: C12, C22, C52.
Highlights
The Iranian macroeconomy has been subject to numerous and ongoing shocks and regime shifts in recent decades, including the 1974/75 OPEC oil crisis, social and political upheaval associated with the 1979 Islamic Revolution, a destructive eight-year (1980-1988) war with Iraq, the freezing of the country's foreign assets, a volatile international oil market, economic sanctions and international economic isolation
Conventional techniques allow the incorporation of only single structural breaks in time series
Perron and Vogelsang[7] and Perron[4], have proposed a class of test statistics which allows for two different forms of a structural break: namely, the Additive Outlier (AO) model, which is more relevant for series exhibiting a sudden change in the mean and the Innovational Outlier (IO) model, which captures changes in a more gradual manner over time
Summary
The Iranian macroeconomy has been subject to numerous and ongoing shocks and regime shifts in recent decades, including the 1974/75 OPEC oil crisis, social and political upheaval associated with the 1979 Islamic Revolution, a destructive eight-year (1980-1988) war with Iraq, the freezing of the country's foreign assets, a volatile international oil market, economic sanctions and international economic isolation. A number of studies have developed different methodologies for endogenising dates, including Zivot and Andrews[6], Perron and Vogelsang[7], Perron[4], Lumsdaine and Papell[2] and Bai and Perron[8] These studies have shown that by endogenously determining the time of structural breaks, bias in the usual unit root tests can be reduced. Perron and Vogelsang[7] and Perron[4], have proposed a class of test statistics which allows for two different forms of a structural break: namely, the Additive Outlier (AO) model, which is more relevant for series exhibiting a sudden change in the mean (the crash model) and the Innovational Outlier (IO) model, which captures changes in a more gradual manner over time With this in mind, LP[2] introduced a novel procedure to capture two structural breaks in a series. LP uses a modified version of the ADF test, which specifies two endogenous breaks as follows:
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