The relationship between oil revenues and economic growth, using threshold methods (the case of Iran)

Abstract

In this paper, we study the non‐linear relationship between oil revenues and real output growth of the Iranian economy during 1959–2007 using a threshold error correction model. The estimation results show that the response of economic growth to oil revenue growth in low regimes of oil revenues is greater than in high regimes of oil revenues. The threshold of oil revenues in Iran is about 37 per cent, in a way that increasing the oil revenues over this threshold results in aborting its positive impact on the gross domestic product and its significant effect. In addition, the impact of capital stock on economic growth in low oil revenues is also much more than that in high oil revenues. These results confirm the resource curse, higher rent‐seeking activities and lower productivity hypothesis, especially during boom periods for oil revenues.