Trade-GDP Nexus in Iran: An Application of the Autoregressive Distributed Lag (ARDL) Model

This paper employs annual time series data on Iranian exports, imports and economic growth from 1960 to 2003. Procedures are used to endogenously identify structural breaks in these macroeconomic series and then to incorporate these breaks in unit root tests. An initial finding is that the endogenously determined structural breaks coincide with important phenomena in the Iranian economy, including the Islamic revolution in 1978 and the start of the Iran-Iraq war in 1980. The error correction version of the autoregressive distributed lag procedure is then employed to specify the short and long-term determinants of economic growth in the Iranian economy taking these structural breaks into consideration. The results show that while the effects of gross capital formation and oil exports are important for the expansion of Iranian GDP over the sample period, non-oil exports and human capital are generally less important. The results also show that a deviation from the long-term growth rate in GDP in Iran is corrected between 46 and 60 percent in the following year.