The effect of transitory and permanent shocks to oil on inflation of Iran: The application of the Blanchard-Quah

Crude oil is one of the most significant and invaluable substances and reserves of nature. Given the facts that the oil price market has always been unstable due to the international economic-political and military developments and that Iran’s economy is strongly dependent on oil revenues, so Iran’s economy is subject to the shocks induced by sudden fluctuations of oil price. The present study aimed to explore the impact of oil shocks on Iran’s inflation over the period ۱۹۹۱-۲۰۱۶. To this end, oil shocks are decomposed to permanent and transitory components by the Blanchard-Quah technique. Then, a structural vector autoregressive model is employed to investigate the effect of permanent and transitory shocks to oil on inflation in Iran. The results of model estimation reveal that temporary shock to oil price has a long-term impact on inflation. Price changes due to permanent shocks to oil price are reflected in a <۱% increase in inflation.

Keywords:

Shock , Oil , Inflation , Blanchard-Quah