The Effects of Oil Revenues Shocks on Households’ Consumption Expenditures in Iran

The main purpose of this study is to study the effects of oil revenues shocks on household consumption in the economy of Iran over period 1973-2014. In order to achieve this goal, firstly, the positive and negative shocks of oil prices have been extracted using the Hodric-Prescott (HP) approach. Subsequently, by applying the Dynamic Ordinary Least Squares (DOLS) method and using the error correction pattern (ECM), the effects of oil revenue shocks on household consumption in the long run and in the short run are estimated. The results of the long-run model estimation show that in the long run, the positive and negative shocks of oil revenues had a significant positive and negative effect on household consumption, respectively. In the short run, the positive and negative shocks of oil revenues are not significant. So, the Iranian households’ consumption is affected by positive and negative shocks in the long run. The spillover of oil revenues increases the liquidity and false demand for goods and services in Iran. Thus, the targeted spending of oil revenues and the allocating it for investments decrease the liquidity and inflation and avoid the false demand of Iranian households.
JEL Classification: C23, C32, E 21