Impact of Increase in Oil Revenues on Industrial Value-Added in Iran

The main objective of this study is to investigate the impact of oil price shocks on value-added of industrial sector, within the theoretical framework of the Dutch disease. Co-integration method is applied to evaluate and test hypothesis, using data during 1978-2010. We have first introduced a VAR model of value-added of industry using previous studies. Then, after investigating the stationary status of the variables and determining optimal lag length, the effect of shocks on the co-integration vector and the test of cumulative recursive sum of residuals were carried out to verify the presence of structural breaks. Finally, we investigated the long-run equilibrium relationship among variables. The results show that there is no long-run equilibrium relationship among the variables. Analysis of the results shows that rise in oil revenues has a direct impact on the real exchange rate and domestic inflation and, it also has an indirect negative effect on the value-added of industry. The results indicate that the best way to deal with this phenomenon in the country is proper management of foreign exchange fund to prevent excess liquidity in the economy