Empirical Analysis of Volatilities of Oil Price and Exchange Rate on Economic Growth in Iran

Economic growth as a main development indicator is of special importance in each economy. As a result, investigating the factors affecting the economic growth is important. Resilient economic pattern means a set of principles that provides a framework for improving national economy under the economic sanctions. Given that the global oil market and the Iranian exchange rate market have been highly volatile in the past four decades, and Western block’ sanctions against Iran have affected this volatility, determination of the severity and how to impact of oil and exchange rate shocks on the Iranian economy is of great importance. This study examines the relationships among oil price fluctuations, exchange rate fluctuations and the impacts of economic sanctions on Iran's GDP using annual time-series during 1971- 2012. To this end, first indexes for the uncertainty caused by the fluctuations of oil prices and exchange rates are estimated using GARCH model, then the interactions among variables are investigated using Vector Auto-regressive model, and finally the long-term relationships of variables under study are derived via Co-integration Model. The findings suggest that long-term fluctuations in oil prices have positive effects on gross domestic product; however, exchange rate fluctuations have negative impacts on gross domestic product.