Abstract

This paper investigates the effect of oil income on real exchange rate defined as relative prices of non-tradable to tradable sector in Iranian economy. Increase in oil income, increases demand for both tradable and no-tradable goods. Tradable goods prices follow international prices while non-tradable prices are set in domestic markets. Therefore increase in oil income will result in real exchange rate appreciation and change in resource allocation in different economic sectors. Oil windfalls have changed the structure of the economy and relative prices such that the shares of agriculture and industry have decreased and the shares of services and construction have increased in GDP. The results show that there is a long run co-integration relation between oil income, capital outflow, GDP and real exchange rate.

This work is licensed under a Creative Commons Attribution 4.0 License.