Terms of Trade Effect on Economic Growth in Iran: Markov Switching Model

Effect of terms of trade as a variable in balance of payments adjustment and long run growth, has been considered since a long time ago. Hence, main purpose of this article in analyzing behavior of economic growth and terms of trade effect on it in Iran's economy by using quarterly data in period 1990:2-2014:3. For this reason, a regression pattern is designed and then one time is analyzed by Markov Switching Model with Fixed Transition Probability and another time by Markov Switching Model with Time Varying Transition Probability.
Generally the result of estimation represent that terms of trade changes has a positive but very low impact on Iran economic growth which can be ignored. So, the behavior of economic growth in Iran is not affected by the behavior of terms of trade. What's more, among all the considered variables, the effect of real oil price is significant. In addition to this, the effective real exchange rate is the effective variable on switching regimes. Furthermore, estimation by Markov Switching Model with Fixed Transition Probability is more compatible with Iran's economy.