International Journal of Economy, Management and Social Sciences, 2(11) November 2013, Pages: 928-938

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International Journal of Economy, Management and Social Sciences

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The Effect of Oil Price Volatilities on Macroeconomic Variables in Iran (Structural Vector Auto Regression Approach)
Mahdi Keikha *1, Hossein Parsian 2, Amir Shams Koloukhi 3
1 2 3

MA student, faculty of Economics, Allameh Tabatabaie University, Iran. Young Researchers and Elite Club, Torbat-e-Jam Branch, Islamic Azad University, Torbat-e-Jam, Iran. Young Researchers and Elite Club, Torbat-e-Jam Branch, Islamic Azad University, Torbat-e-Jam, Iran. AB STR AC T In this study we investigate the positive and negative effects of oil price volatilities (asymmetric effect) on GDP, consumer price index, imports, government expenditure and money stock using quarterly data trough the Structural VAR approach and using Impulse Response Function and Variance Analysis. Results of Impulse Response Function and Variance Analysis indicate that economy of Iran is sticky to the oil income. The effect of oil shocks on studied macroeconomic variables is as expected and asymmetric and was divergent for most variables. This effect is not adjusted even in the twenty seasons. Oil shocks (especially positive shocks) have serious and significant role in volatilities of other variables in long-term.
2013 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

AR TIC LE INF O Keywords: Oil prices volatility macroeconomic variables Structural VAR approach Hodrick-prescott filter Irans economy

1.

Introduction

Iran's foreign trade performance is still affected by the presence of oil as the most important exported goods so that on one hand the oil income will compensate the imbalance in foreign trade with provision of foreign exchange for imports and against unpredictable nature of oil income causes unexpected imbalances in foreign trade. Foreign trade in economy of Iran is dependent on oil exports and it has very high share in total exports. Oil exports in the last 30 years comprise average 89 percent of total exports of Iran. Unexpected imbalances in foreign trade have affected fundamental variables such as exchange rate, inflation, and money stock and generally will face macroeconomic goals with challenges. The oscillatory changes in oil price, although as nominal, in recent years have been associated with volatilities in other macroeconomic variables. Statistical evidence suggests a close relationship between oil shocks and behavior of other macroeconomic variables in Iran, so review of this relationship is essential for economic studies now. Because, despite vast oil incomes which is earned by rising in oil price and it gives more freedom to policy makers to secure countrys expenditure (especially current expenditure), inattention to the Hartwick law (1977) has had unfortunate consequences such as accelerating inflation and multiple liquidity and extreme imports and it has caused a negative factor for the prosperity of the Iran. Therefore in the present study we have investigated this important issue. For this purpose we have used GDP Data, consumer price index, money stock, imports, world index of oil price and government expenditure as logarithmic form and seasonally from the first quarter 1994 to fourth quarter 2010 and although using the ISF2010 data source. All variables are as actually and in terms of national currencies (Rial). In order to all data have one scale we used mentioned seasonal exchange rate of IFS2010, and also to investigate the effects of oil price shocks on macroeconomic variables we applied SVAR model. To identify the status of the oil price shocks and its role in explaining the volatility of other variables has used Impulse Response Function and Variance Analysis. And Johansen and Joselius co-integration method has used to extract the convergence vectors between the variables.

2.

Review of literature

Jimenez-Rodriguez and Sanchez (2004) [1] have attempted to calculate the effect of oil shocks on macroeconomic variables using VAR model as linear and nonlinear, in some industrialized countries. They have shown that oil price raising have negative effect on economic activities in oil-importing countries except Japan. Chang and Wong (2003) [2] in their study entitled Oil price fluctuations and Singapore economy using Impulse Response Function and Variance Analysis indicates that impact of oil volatilities on GDP, inflation and unemployment have been significant. Cunadoa and Graciab (2005) [3] have studied the impact of oil volatilities on GDP and inflation for some Asian countries. They have seen that this effect is asymmetric and significant and limited to the short-term. Papapetrou( 2001) [4] in an article entitled "oil shocks, stock market, economic activities and employment in Greece" using VAR model have found oil shocks in the mentioned variables as significant and they have shown that oil volatilities can be explain stock market volatility and variable interactions.

* Corresponding author. Email address: mhdkeikha@gmail.com

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Berument et al (2010) [5] examined the impact of oil shocks on production growth in selected MENA countries that selected countries include the Petroleum Exporting Countries and oil-importing countries too. Their results shows that increase in oil price have a significant and positive impact on production in MENA countries. Jimenez-Rodriguez and Rebeca (2011) [6] have studied the role of macroeconomic structure in industrial production in response to oil price shocks in OECD countries. They concluded that the reaction to oil shocks is different and this difference is rooted in the mechanisms of transmission of this shocks to these countries.

3.

Methodology

To examine the effects of oil price volatilities on macroeconomic variables, SVAR model is used. We use Impulse Response Function and Variance Analysis to identify the status of the oil price shocks and its role in explaining the volatility of other variables, also Johansen and Joselius co-integration method applied to extract the convergence vectors between the variables. 3.1 Extraction of oil price cycles The main problem that economists face in examine the volatility of variable is the separation of cycle and trend [7]. Using Hodrick-prescott filter, the oil shocks can be separate to positive and negative shocks and its cycle can be extract. See figure 1 about the separation of cycle and trend using Hodrick-prescott filter, A1 is positive shook and A2 is negative shook:

Figure 1. The separation of cycle and trend using Hodrick-prescott filter

Source: Research Findings

3.2 Data introduction In this research to study the effect of oil shocks on macroeconomic variables we have used GDP Data, consumer price index, money stock, imports, world index of oil price and government expenditure as logarithmic form and seasonally from the first quarter 1994 to fourth quarter 2010 and although using the ISF2010 data source. . All variables are as actually and in terms of national currencies (Rial). In order to all data has one scale we used mentioned seasonal exchange rate of IFS2010.We introduce data as follow: LGDP: logarithm of real GDP, LCPI: logarithm of CPI, LM: logarithm of money stock addition to quasi-money, LIMH: logarithm of real imports, LEH: logarithm of real government expenditures, LOILRIH: logarithm of crude oil price index, A1: positive shocks of oil extracted from the HP filter, A2: negative shocks of oil extracted from the HP filter, S1, S2, S3: Dummy seasonal variables respectively for the first until three chapters. 3.3 Research model In this research, econometric modeling and pattern of SVAR has been used to study volatility and both Impulse Response Function and Variance Analysis is used to review the status of the oil price shocks and its role in explaining volatility of other variables. Johansen and Joselius co-integration method has applied to extraction the long-term relationship between variables that it shows despite being non stationary variables on level, SVAR model can be used as three models (1), (2), (3) in follows:

f1 ( Loilrih , Lcpi , Leh , Limh , Lm , Lgdp ) f 2 ( A1, Lcpi , Leh , Limh , Lm , Lgdp ) f 3 ( A2 , Lcpi , Leh , Limh , Lm , Lgdp )

(1) (2) (3)

3.4 Structural Var We assume that in non-restricted VAR model, current value of variables completely will explain with combination of lag values and error statistical sentences (ESS). This method inherently has two major faults. First the simultaneous relationship between variables will not be allowed, especially in low frequency data that variables affect together rapidly, makes model into trouble. And second it not discuses about

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potentially long-term interaction between variables. Another criticism is that VAR model does not consider for economic theory and it considers only the data structure. To solve the aforementioned problems and entering the economic theories to time series model we imposed restrictions to model. 3.4.1 short-term constrains Considering that model has two endogenous variables yt and zt and four exogenous variables yt-1 , zt-1 , uy and uz, and variables uy and uz are called the structural shocks, our system model is introduced as follows:

yt b12 z t cy 11 yt 1 12 zt 1 uyt b21 y t zt cz 21 yt 1 22 zt 1 uzt

Converting the equation to summarized form we have:

(4) (5)

yt zt

c y b12 cz 1 b12b21 c z b21c y 1 b12b21

11 b12 21 b 1 yt 1 12 12 22 zt 1 (u b12u zt ) 1 b12 b21 1 b12b21 1 b12b21 yt 21 b21 11 b 1 yt 1 22 21 12 z t 1 (uzt b21u yt ) 1 b12 b21 1 b12b21 1 b12b21
(6)

As the VAR (1) model we can say:

yt k y d11 yt 1 d12 zt 1 eyt zt k z d 21 yt 1 d 22 zt 1 ezt (7)

Now we can extract amounts of k and d from equation 7 and knowing amounts of b, amounts of C and _ can be achieved. Finally we can propose the zero hypothesis of covariance of structural model shocks. As we want to explain macroeconomic volatilities by distributions 2 b , b , y , z2 which are independent, due to the above content, variables 1 2 2 1 and three equations related to y,z and their covariance can be introduce. We need to impose restriction on one of the structural model parameters to obtain these amounts. A common method to imposing the zero restriction is applying the Choleski factorization. To do this, first we arrange variables from the most exogenous variable to the most endogenous variable. As a result in the most exogenous model, structural model shock will be equaled with summarized model shock. In the simple two-variable model we have:

b21 0 eyt u yt ezt u zt b21u yt ezt u zt b21eyt (8)

Similar methods are used in the states of n-variable. There are different ways to determine the exogenous degree of variables and to sort them. One of these methods is using significant of coefficients in VAR model. Another method is VAR Granger Causality Block Exogeneity Wald Tests that has more explicitly to the first method. 3.4.2 Long-term restrictions Some restrictions are related to long-term. For example, according to Monetarists theory, changes in money supply will affect production in short-term, but it has no impact on production level in long-term. These theories imposing long-term restriction on non-restriction VAR model can be studied. In the two-variable model described above, according to Wald theorem there is a possibility to explain each variables as moving average of the shocks of nstructural model.

y t c1 1 ( L ) u y t c1 2 ( L ) u z t z t c 2 1 ( L ) u yt c 2 2 ( L ) u zt (1 0 )

These cij (s) are lag polynomials. Now if cij = 0; long-term effect of shock j on variable i is equal to zero [8]. 3.4.3 Determining the exogenous ranking of variables In SVAR model to impose the short-term restriction we have to rank variables from most exogenous variable to most endogenous variable. To accomplish this, we have used VAR Granger Causality/Block Exogeneity Wald Test. This test is done for all (1), (2) and (3) models. The test results shows that rank of variables from most exogenous to most endogenous variable in model (A) is as follows:

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Table 1.Exogenous Rank of variable in model A Exogenous Rank 1 2 3 4 5 6 Prob 0/29 0/25 0/0093 0/0017 0/000 0/00000 Degree of freedom 10 10 10 10 10 10
Source: Research finding

Amount of Statistic 11/86 12/47 23/42 28/19 74/56 311/78

Variable Leh Lm Loilrih Limh Lcpi Lgdp

Table 2.Exogenous Rank of variable in model B (For positive shocks) Exogenous Rank 1 2 3 4 5 6 Prob 0/25 0/0039 0/0015 0/0001 0/0000 0/00000 Degree of freedom 5 5 5 5 5 5
Source: Research finding

Amount of Statistic 6/59 17/33 19/60 24/94 52/72 74/67

Variable A1 Leh Lm Limh Lcpi Lgdp

Table 3.Exogenous Rank of variable in model C (Negative Oil Shocks) Exogenous Rank 1 2 3 4 5 6 Prob 0/42 0/03 0/01 0/0001 0/0000 0/000000 Degree of freedom 5 5 5 5 5 5
Source: Research finding

Amount of Statistic 4/91 11/65 14/23 25/66 52/55 74/42

Variable A2 Leh Lm Limh Lcpi Lgdp

3.4.4 Stationary In this section we are studying the stability of variables. To review the stability of seasonal variables at first we should make seasonal adjustment, and then we must test the stability. To seasonal adjustment first we estimate the following regression:

X t 1S1t 2 S 2t 3 S3t t

(12)

S1, S2, S3 are Dummy variables respectively for the first to third seasons, in the next step we make unit root test on values of residuals of above regression.
Table 4.Unit root test results for stability variables (after seasonal adjustment) variable LGDP dLGDP LCPI dLCPI LE dLE LIMH dLIMH LIM dLIM Loilrih d Loilrih Tau statistical 2.984.763.383.442.186.810.6911.0810.559.172.0114.91Critical values %95 3.503.503.502.923.513.502.913.492.913.493.493.49Source: Research finding

Equation type With intercept and trend With intercept With intercept and no trend With intercept and no trend Without intercept and trend Without intercept and trend With intercept and no trend Without intercept and trend With intercept Without intercept and trend Without intercept and trend Without intercept and trend

I 1 0 1 0 1 0 1 0 1 0 1 0

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The result of unit root tests shows that all the variables are non-stationary on level and with first difference make be stable. 3.5 Convergence test of variables To convergence test and extract the long-term relationship between variables Johansen and Joselius method is used, of course seasonal variables are entered to model in order to seasonal adjustment too. 3.5.1 VAR Lag order selection Criteria To determine the Order, due to the volume of observations are less than 100, Schwarz criterion is used (which considers minimum of lag and prevent reduction the degree of freedom). There are different criteria for choosing the optimal lag length that we can note and explain Akaike Criterion (AIC) and Schwarz- Bayesian (SBC) as follows.

AIC( n) Ln det n
SBC( n)

2m 2 n T Ln det n m 2 nLnT
det n

(13) (14)

Schwarz-Bayesian criterion for small samples and Akaike criteria for larger samples is applicable. In this equation, m is number of model variables, T is sample size, is determinant of covariance matrix. In this step, the Lag Length Criteria of VAR given that

sample size is less than 100 through Schwartz - Bayesian criterion is determined. According to Schwartz and Hanan Queen Criteria, lag of VAR will be selected equal 2. See following table:
Table 5

Source: Research finding

3.5.2 Determining the number of cointegration vectors To determine the number of convergence vectors, we can use Trace Statistic and Eigen Value Statistic and to determine the number of cointegration vectors we can use Trace Statistic [9].

) trace 2LnQ n Ln(1 i

i r 1

r 0,1,2,...n 1

(15)

Q is the ratio of restricted Maximum likelihood function to unrestricted maximum likelihood function

is Eigen values and n is the

number of observations. This statistic has been adjusted such when there is no convergence vector between model variables, it offers Zero quantity. And in the existence of r convergence vector there will be exist r Eigen value.

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Table 6

Source: Research finding

Other test in order to determining the number of cointegration vector is Maximum Eigen value test that will present as follows:

max nLn 1 r 1

r 0,1,2,..., n 1

(16)

This statistic has asymptotic distribution and it test existence of r convergence vector against alternative hypothesis (existence of r+1 convergence vector). Most studies show that both Trace Statistic and Eigen Value Statistic lead to similar results, but in some cases the result of two methods may be different. Monte Carlo simulation studies have shown that when error sentences have strain and skew more than normal distribution, Trace Matrix test results have more valid. But given that maximum of Eigen value method(

max ), have accurate

and robust alternative hypothesis, Therefore this method usually used to determining the number of convergence vector [10].
Table 7

Source: Research finding

According to the both tests, there are two convergence vectors. Using the economic theory, following relationship can be extracted for present study.
Table 8.

Source: Research finding

3.6 Variance Analysis To investigate the share of oil price in explaining the volatility of macroeconomic variables, we applied Variance Analysis of SVAR model, so that first general effect and second the effect of positive and negative shocks in explaining the volatility is used.

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3.6.1 Examine the volatility of LGDP (Model A) Variance Analysis indicated that most of LGDP volatilities in short-term (About 23 to 50 percent) is related to LGDP itself and money stock (about 31%), imports (about 13%), oil price (about 22%) have biggest share of LGDP volatility explanatory in short-term. Money stock have share (about 26%) of LGDP volatilities explanatory in longterm. In analysis of oil price to positive and negative volatilities, it can be seen that negative shocks have more effect. So that positive and negative shocks explain respectively about 3% and 9% of LGDP volatilities in shortterm, this share has changed and reaches to 8% and 7% in the long term. It shows that impact of positive shock in longterm is more than short-term. 3.6.2 Investigation of money stock volatilities Model shows that about money stock volatilities in short term, from the second season, share of oil price increases highly. It reaches from 35% to 43% in short term which is biggest share of money stock volatilities. Imports share is about 15% that is third factor in explaining LM volatility in long- term. In analysis of Oil price to positive and negative volatilities, it can be seen that the share of these variables in short- term is about 17% and 9% respectively and it is about 39% and 7% in long term. That shows money stock stickiness to lower in Oil price volatility explanatiory. 3.6.3 Review of import volatilities The greatest volatilities in imports are related to itself and then Consumer Price Index with about 20% has the highest share from imports volatilities. Oil price explain volatilities of imports about 5% in short-term, and having 37% of import volatilities contains the biggest share in long term. The study of shocks also shows that positive and negative shocks explains respectively 5% and 6% of import volatilities in the short term and about 38% and 2% in the long term that( like other variables )the share of positive shocks is more. 3.6.4 Review of Consumer Price Index volatilities The greatest volatilities in consumer price are related to itself in short-term, and then about 10% of price volatilities are related to imports. Oil prices have no large role in price volatilities in short- term. Imports having about 35% contain largest share in price volatilities in longterm and also oil price explain about 25% of price volatilities and about 11% of price volatilities is related to money stock. Positive and negative shocks have tiny share in price volatilities about 1% and 2% in short-term and this share reaches to 20% and 1% in long-term that indicates the higher share of positive shocks in price volatility. 3.6.5 Review of government expenditure volatilities The greatest volatilities in government expenditure are related to itself and then about 10% of government expenditure volatilities are related to oil price. Oil price explains about 34% of government expenditure volatilities in long-term. Also in shock analysis, it is observed that the share of positive and negative shocks in short-term is about 15% and 8% and it explain about 31% and 9% of government expenditure volatilities in long term. 3.6.6 Results of Variance analysis In SVAR model the effect of oil shocks is symmetric and oil's share from volatilities of macroeconomic variables has increased. The effect of positive shocks is more and variables show stickiness by reducing oil price. Lack of regarding the economic structure will leads to misleading results in conclusions in the VAR model. Using SVAR model, rank selection of variables (that it will transform the results) make be possible as correct. We present our result in tables 9 and 10 as follows:
Table 9. The share of oil price in macroeconomic variables volatilities in SVAR model period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 LGDP 29.32498 20.04375 17.24516 16.32927 15.6586 14.9493 14.22937 14.00023 14.06508 14.28321 14.32585 14.5139 14.93795 15.41895 15.72801 16.0585 16.51908 17.00086 17.37874 17.75107 LM 1.21 0.206374 0.486419 1.864827 3.312905 4.929471 6.627614 8.59578 10.38257 11.96663 13.43653 14.85098 16.1266 17.26974 18.33368 19.33616 20.25618 21.09963 21.88885 22.62873 LCPI 5.603343 3.634591 2.681954 2.699422 2.60129 2.656705 3.112052 3.288567 3.024922 2.78201 2.664181 2.730567 3.10715 3.662957 4.241115 4.941053 5.832734 6.779782 7.682627 8.60998 LIMH 2.424829 9.448034 9.255506 9.906878 9.618539 9.425142 9.22853 9.174496 9.211138 9.337677 9.463022 9.729938 10.12351 10.49863 10.81016 11.17907 11.62177 12.04387 12.41929 12.424829 LEH 0 0.354354 1.71068 4.536034 8.160547 12.13948 15.96252 19.33136 22.10642 24.33847 26.11314 27.51873 28.63427 29.53425 30.27322 30.88766 31.40526 31.84837 32.23146 32.56442

Source: Research finding

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Table 10. The share of positive and negative volatilities of oil price in volatilities of other variables in SVAR model LGDP A1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 4.753493 3.728756 3.85573 4.179889 4.526569 4.845664 5.135535 5.404282 5.659446 5.906479 6.148876 6.388612 6.626604 6.863085 7.097886 7.330623 7.560827 7.788018 8.011749 8.231629 A2 13.36558 9.761972 9.359875 9.224456 9.075767 8.912584 8.750679 8.595644 8.448711 8.309987 8.179165 8.055729 7.939085 7.828642 7.723855 7.624232 7.529338 7.438789 7.352249 7.26942 A1 0.342261 3.333501 6.575117 8.725528 9.939387 10.61872 11.02849 11.31095 11.53812 11.74501 11.94747 12.1517 12.35907 12.56881 12.77929 12.9887 13.19541 13.39805 13.59556 13.78716 LM A2 0.592127 0.663993 0.581264 0.508391 0.470688 0.470969 0.505872 0.568711 0.651788 0.747966 0.851436 0.957872 1.064259 1.168604 1.269672 1.366751 1.459485 1.547752 1.631576 1.711073 A1 0.134319 0.472416 0.541963 0.499154 0.435953 0.380313 0.348164 0.351705 0.399461 0.496073 0.642641 0.837391 1.07647 1.354701 1.666217 2.004956 2.36502 2.740904 3.127633 3.520828 LCPI A2 3.695866 1.931925 1.423115 1.150674 0.980664 0.860187 0.770365 0.704018 0.657441 0.62806 0.613742 0.612565 0.622757 0.642688 0.670871 0.705958 0.746742 0.792147 0.841225 0.893146 A1 1.041468 0.829244 0.878606 1.078052 1.373213 1.719535 2.092095 2.475911 2.861708 3.243896 3.619199 3.985737 4.342469 4.688858 5.024681 5.349907 5.66463 5.969026 6.263325 6.547792 LIMH A2 2.332855 2.014145 2.409582 2.737826 2.916174 3.013844 3.071406 3.106643 3.128744 3.143115 3.15302 3.160427 3.166527 3.172031 3.177357 3.182739 3.1883 3.194089 3.200119 3.206374 A1 1.691624 2.318472 5.661081 9.181604 12.11118 14.37969 16.098 17.39459 18.37603 19.12288 19.69426 20.13324 20.47134 20.73176 20.93183 21.08457 21.19993 21.28556 21.34743 21.39021 LEH A2 0.674967 0.562253 1.030384 1.606187 2.132015 2.564929 2.90718 3.173882 3.381018 3.542109 3.667785 3.766156 3.843354 3.904008 3.951633 3.988917 4.017933 4.040299 4.057285 4.0699

Source: Research finding

3.7 Review of Impulse Response Function 3.7.1 The effect of oil shocks on GDP Review of Impulse Response Function shows that an increasing shock from oil price has a positive effect on LGDP. Although about two seasons, it causes reducing effect on LGDP and leads to economic surprises (especially economy which is heavily dependent on oil) and efficiency reducing. Despite intensity of positive oil shocks, it can be seen that effect of negative shocks causes decreasing in GDP and it shows that production is dependent on oil in Iran. See figure 2. 3.7.2 The effect of oil shocks on money stock Review of Impulse Response Function shows that the oil price shock has positive effect on money stock and this effect reaches to its peak in the third season and will not adjusted in 20 chapters that its due to the lack of foreign currency storage system in the country. Negative oil shocks have a positive effect on money stock too, but these effects is much less than positive effects of oil price which can be attributed to the government borrowing at the time of budget decreasing due to oil shocks and liquidity increasing.

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Figure 2

Source: Research finding

A1
Figure 3

A2

Source: Research finding

A1

A2

3.7.3 The effect of oil shocks on consumer price index Review of Impulse Response Function shows that the oil price shock has positive and divergent effect on general prices except four seasons and shock analyzing shows that positive oil shock initially causes negative effect on price level (that could be due to economic boom). This process with government strong rising demand and inability of supply-side in response to these demands causes to price increase as divergent. The effect of negative shocks on price level ultimately increases prices due to government borrowing from central bank and money stock rising.
Figure 4

Source: Research finding

A1

A2

3.7.4 The effect of oil shocks on imports Review of Impulse Response Function shows that a shock equal to standard deviation from oil price causes positive effect on imports (that is because the increase in oil income and domestic demand offset from import). Negative shock of oil price will reduce imports but gradually has small positive effect on imports due to the tendency to replace of non-oil exports with oil exports and need to new technology and imports of raw materials and machinery. But positive oil shock has increased imports.

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Figure 5

Source: Research finding

A1

A2

3.7.4 The effect of oil shocks on government expenditure Positive shock equal to standard deviation reduces government expenditure about two seasons (because of need to a time for reaction and taking bureaucracy steps to increase the expenditure) and then leads to a sharp increase in expenditure as divergent. Of course negative shock increase government expenditure as less that it can attribute to sticky of government expenditure.
Figure 6

Source: Research finding

A1
4. Conclusion

A2

Volatilities and oil price shocks cause disruptions and volatilities in macroeconomic variables. Results of Variance Analysis indicated that oil price have a considerable role on volatility of other variables (especially in long-term). Because oil is the main source of income in Iran, share of negative shocks are less than positive shocks that it represent the stickiness of variables to reduction of oil price. Result of Impulse Response Function showed that oil shocks lead to extreme effects on the studied variables. For example, the effect of oil price shocks on inflation and liquidity (that have been basic problem in recent years in Iran) or irregular increasing in imports and volatilities of government expenditure could be derived from this function. Finally oil shocks volatilities are generally divergent or have very low convergence rate and are sticky to reduction of oil price. However, it is better creating Reserve Account or Fund to prevent spreading volatilities of oil price into economy and because control of other variables volatilities would be difficult due to their divergent, we should consider the economic structure to choose the timeseries models for economic studies.

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