Investigating the impact of oil revenue fluctuations on liquidity in Iran during 1990-2012 using dynamic conditional correlation

Fluctuations in oil revenues are one of the most important economic issues in oil producing countries. Sound fiscal and monetary policy to soften the effects of exogenous fluctuations in oil revenues in the domestic economy has been a controversial issue in economic policy-making bodies. The main purpose of this study is investigating the effects of oil revenue on liquidity in Iran during 1990-2012 using Engle (2002) dynamic conditional correlation method. As this method assumes correlations varying during time, it makes it possible to enhance the analyzing power of phenomena during studied period Such as wars, business cycles, economic, political, and environmental phenomena. The results show that despite the volatile nature of the relationship between oil revenues and liquidity, correlation between these two variables has been always positive. That is, oil with the severity of different impacts, has always been one of the factors increasing liquidity.