Quarterly Journal of Quantitative Economics (JQE)

The effects of external uncertainty shocks on Iran's macroeconomy

https://doi.org/10.22055/jqe.2023.40809.2483
Volume 22, Issue 2 - Serial Number 85
Vol. 22, No. 2, summer 2025
Summer 2025
Pages 1-41
Quarterly Journal of Quantitative Economics (JQE)

Document Type : Research Paper

Authors

Fatemeh Ansari 1
Ali Rezazadeh 2

1 PhD in Financial Economics, Department of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran

2 Associate Professor of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran

Abstract
Iran's economy has been affected by several shocks in different years. Among these, uncertainties in the area of oil shock, financial market shock and economic policy shock are the most important and obvious shocks that have affected macroeconomic variables. The main purpose of this paper is to investigate the effects of external uncertainty on Iran's macroeconomy using a nonlinear cointegrating autoregressive distributed lag (NARDL) model. The three most widely used economic policy uncertainties (EPU), financial markets (VIX) and energy market (OVX) in the period 1985-2020 are considered in this paper and the short-term and long-term nonlinear asymmetric relationship between these three types of uncertainty and Macroeconomic variables are examined. Empirical results provide significant evidence of a short-term relationship between various types of uncertainty shocks and Iran's macroeconomy. In the long run, the results show that the most irrelevant parameter on domestic production is US government-based economic news and the most relevant factor of uncertainty on Iran's macroeconomy; Exchange rate and oil market shocks. International financial market shocks have an asymmetric effect on money supply, and reduced energy market uncertainty may lead to increased money supply. Based on the findings of the study, economic policymakers are advised to calculate the severity and direction of external shocks in their policies in order to create macroeconomic growth and stability, and to take preventive measures regarding them.

Keywords

External Uncertainty
Economic Policy
Financial Markets
Energy Market
Macroeconomic variables
Subjects
Albaji, Y., Azarbayjani, K., & Daei-Karimzadeh, S. (2024). The response of Iranian economy to monetary and exchange rate policies shocks based on the foreign sector: A dynamic stochastic general equilibrium analysis. Quarterly Journal of Quantitative Economics (JQE), 20(4), 1–37. https://doi.org/10.22055/jqe.2021.33852.2255 (in Persian)
Ahad, M., & Anwer, Z. (2020). Asymmetrical relationship between oil price shocks and trade deficit: Evidence from Pakistan. The Journal of International Trade & Economic Development, 29(2), 163–180.
Ahmadi, L., Emami, K., Torabi, T., & Farzinvash, A. (2025). Comparative comparison of the effect of oil shock on macroeconomic variables in Iran and GCC countries. Quarterly Journal of Quantitative Economics (JQE), 21(4), 1–38. https://doi.org/10.22055/jqe.2021.36328.2330 (in Persian)
Allen, D. E., & McAleer, M. (2020). A nonlinear autoregressive distributed lag (NARDL) analysis of West Texas Intermediate oil prices and the DOW JONES index. Energies, 13(15), 4011–4302.
Asafo-Adjei, E., Boateng, E., Isshaq, Z., Idun, A. A. A., Owusu Junior, P., & Adam, A. M. (2021). Financial sector and economic growth amid external uncertainty shocks: Insights into emerging economies. PLOS ONE, 16(11), 259–303.
Barguellil, A. (2021). The asymmetric indirect impact of real exchange rate on economic growth through foreign trade: An asymmetric ARDL panel model. Asian Economic and Financial Review, 11(8), 658–671.
Bayani, O., Mohammadi, T., Bahrami, J., & Tavaklian, H. (2019). The effect of shock factors on financial crises in the Iranian economy: A self-regression approach to variable-time parameter vector. Economic Modeling, 13(46), 45–72. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=491522 (in Persian)
Behboodi, D., Motafaker Azad, M. A., & Rezazadeh, A. (2009). The effects of oil price instability on GDP in Iran. Energy Economics Studies, 6(20), 1–31. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=100296 (in Persian)
Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The Quarterly Journal of Economics, 98(1), 85–106.
Bi, Y., & Anwar, S. (2017). US monetary policy shocks and the Chinese economy: A GVAR approach. Applied Economics Letters, 24(8), 553–558.
Bloom, N. (2009). The impact of uncertainty shocks. Econometrica, 77, 623–685.
Caggiano, G., Castelnuovo, E., & Groshenny, N. (2014). Uncertainty shocks and unemployment dynamics in U.S. recessions. Journal of Monetary Economics, 67, 78–92.
Caldara, D., Fuentes-Albero, C., Gilchrist, S., & Zakrajšek, E. (2016). The macroeconomic impact of financial and uncertainty shocks. European Economic Review, 88, 185–207.
Christou, C., Gabauer, D., & Gupta, R. (2020). Time-varying impact of uncertainty shocks on macroeconomic variables of the United Kingdom: Evidence from over 150 years of monthly data. Finance Research Letters, 37, 1–21.
Delavari, M., Shirin Bakhsh Masouleh, Sh., & Dasht-e Bozorgi, Z. (2008). Investigating the impact of oil prices on Iran’s economic growth using asymmetric convergence. Energy Economics Studies, 5(18), 65–80. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=100384 (in Persian)
Dehmarde, N., & Roshan, R. (2009). Investigating the impact of economic uncertainty on money demand: A case study of Iran. Journal of Economic Research, 44(3), 1–22. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=103938 (in Persian)
Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton University Press.
Ebrahimi, S. (2011). The effect of oil price shocks and exchange rate fluctuations and the resulting uncertainty on the economic growth of selected oil countries. Journal of Commerce, 15(59), 83–105. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=229879 (in Persian)
Enders, W., & Hoover, G. A. (2012). The nonlinear relationship between terrorism and poverty. American Economic Review, 102(3), 267–272.
Erfani, A., & Charmgar, A. (2014). Investigating the effect of oil price uncertainty on macroeconomic variables in Iran: Multivariate GARCH method with BEKK specification. Energy Economics Studies, 10(40), 129–147. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=469852 (in Persian)
Fajgelbaum, P., Schaal, E., & Taschereau-Dumouchel, M. (2014). Uncertainty traps. NBER Working Paper No. 19973, 1–92.
Ferrara, L., & Guerin, P. (2018). What are the macroeconomic effects of high‐frequency uncertainty shocks? Journal of Applied Econometrics, 33(5), 662–679.
Ferris, S. P., Park, K., & Winer, C. C. (2013). Causes and consequences of political uncertainty. Journal of Banking & Finance, 37(4), 1297–1308.
Ghirehchian, N., & Goli, M. (2019). Analyzing the effects of monetary policy shocks with asymmetric effects on production in Iran: A time-varying parameters approach. Quarterly Journal of Economic Growth and Development Research, 9(34), 57–74. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=551123 (in Persian)
Gupta, R., Lau, C. K. M., & Wohar, M. E. (2019). Forecasting the US real housing price index: Structural and non-structural models with and without fundamentals. International Journal of Forecasting, 35(4), 1268–1284.
Huang, Y., & Luk, P. (2020). Measuring economic policy uncertainty in China. China Economic Review, 59, 101–367.
Hubbard, R. G. (1994). Investment under uncertainty: Keeping one’s options open. Journal of Economic Literature, 32(4), 1816–1831.
Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551–1580.
Kaminsky, G. L., & Reinhart, C. M. (1999). The twin crises: The causes of banking and balance-of-payments problems. American Economic Review, 89(3), 473–500.
Kiani, K. H., & Kiani Halt, K. (2009). The impact of exchange rate uncertainty on Iranian exports. Iranian Economic Research, 14(41), 1–21. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=82074 (in Persian)
Kiani, K. H., Kiani Halt, K., & Yazdani, S. (2011). The impact of uncertainty in oil prices on investment: A case study of Iran’s oil industry. Energy Economics Studies, 8(1), 131–151. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=136699 (in Persian)
Kilian, L. (2009). Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review, 99(3), 1053–1069.
Kilian, L., & Park, C. (2009). The impact of oil price shocks on the U.S. stock market. International Economic Review, 50(4), 1267–1287.
Koop, G., & Potter, S. M. (1999). Dynamic asymmetries in U.S. unemployment. Journal of Business & Economic Statistics, 17(3), 298–312.
Korobilis, D., & Yilmaz, K. (2018). Measuring dynamic connectedness with large Bayesian VAR models. Journal of Business & Economic Statistics, 36(2), 241–253.
Loungani, P. (1986). Oil price shocks and the dispersion hypothesis. Review of Economics and Statistics, 68(3), 536–539.
Mele, A., & Obstfeld, M. (2020). Oil prices, exchange rates and macroeconomic volatility. Journal of International Money and Finance, 102, 102–118.
Mishkin, F. S. (2015). The economics of money, banking, and financial markets (10th ed.). Pearson.
Mohaddes, K., & Raissi, M. (2018). Compilation and communication of uncertainty measures for the Iranian economy. Energy Economics, 76, 364–386.
Moradi, M., & Shafiei, S. (2013). The effect of oil price shocks on unemployment: Application of Bayesian dynamic factor SVAR model. Energy Economics Studies, 10(36), 1–27. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=221059 (in Persian)
Nelson, C. R., & Plosser, C. I. (1982). Trends and random walks in macroeconomic time series: Some evidence and implications. Journal of Monetary Economics, 10(2), 139–162.
Ozturk, I., & Acaravci, A. (2010). The causal relationship between energy consumption and GDP in Albania. Energy Policy, 38(1), 610–615.
Pindyck, R. S. (1991). Irreversibility, uncertainty, and investment. Journal of Economic Literature, 29(3), 1110–1148.
Poyraz, E., & Engle, R. (2021). Measuring global economic policy uncertainty with entropy-based connectedness. Journal of Econometrics, 222(2), 707–726.
Primiceri, G. E. (2005). Time varying structural vector autoregressions and monetary policy. Review of Economic Studies, 72(3), 821–852.
Quiles, A. J., & Cifuentes, A. (2019). Sectoral dynamics and economic uncertainty. Journal of Economic Dynamics and Control, 109, 103–773.
Quddus, M. A., Goldsman, D., & Farooqi, S. (2020). Global oil price shocks, macroeconomic performance, and policy uncertainty in South Asia. Resources Policy, 68, 101–773.
Ramey, V. A., & Ramey, G. (1995). Cross-country evidence on the link between volatility and growth. American Economic Review, 85(5), 1138–1151.
Raza, N., Menon, R., & Yousaf, I. (2018). The asymmetric effects of oil price shocks on inflation: Evidence from Pakistan. Energy Economics, 69, 278–288.
Ready, R. (2018). Oil prices and the stock market. Review of Finance, 22(1), 155–176.
Roshan, R., & Dargahi, H. (2009). The effect of exchange rate uncertainty on Iran’s non-oil exports to Eurozone countries. Iranian Journal of Economic Research, 14(40), 1–19. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=100297 (in Persian)
Saboori, B., Sapri, M., & Baba, M. (2014). Economic growth, energy consumption and CO₂ emissions in OECD (Organization for Economic Cooperation and Development) countries: A comparison of emission trends among fuel types. Energy, 72, 406–415.
Schmitt-Grohé, S., & Uribe, M. (2012). What’s news in business cycles. Econometrica, 80, 2733–2764.
Shahbaz, M., Nasreen, S., Abbas, F., & Anwar, S. (2015). Does foreign direct investment impede environmental quality in high-, middle-, and low-income countries? Energy Economics, 51, 275–287.
Shahrestani, H., & Pirasteh, H. (2011). The effect of oil price fluctuations on economic growth in OPEC countries. Energy Economics Studies, 8(1), 153–170. https://www.sid.ir/fa/journal/ViewPaper.aspx?id=136700 (in Persian)
Shapiro, A., & Watson, M. W. (1988). Sources of business cycle fluctuations. NBER Macroeconomics Annual, 3, 111–156.
Sims, C. A. (1980). Macroeconomics and reality. Econometrica, 48(1), 1–48.
Taghizadeh-Hesary, F., Yoshino, N., & Abdoli, G. (2019). Fiscal policy, oil price shocks, and the real exchange rate in oil-exporting countries. Economic Analysis and Policy, 63, 178–193.
Tang, W., Wu, L., & Zhang, Z. (2010). Oil price shocks and their short- and long-term effects on the Chinese economy. Energy Economics, 32, S3–S14.
Tavakolian, H., & Bayani, O. (2020). Investigating the impacts of exchange rate volatility on Iranian industries: A time-varying parameters approach. Iranian Economic Review, 24(2), 475–498. https://doi.org/10.22059/ier.2020.76092 (in Persian)
Van Eyden, R., Difeto, M., Gupta, R., & Wohar, M. E. (2019). Oil price volatility and economic growth: Evidence from advanced economies using more than a century’s data. Applied Energy, 233–234, 612–621.
Wang, Y., & Chueh, Y. (2013). Dynamic transmission effects between the interest rate, the US dollar, and gold and crude oil prices. Economic Modelling, 30, 792–798.
Yang, D., Lin, H., & Chen, S. (2020). Asymmetric effects of oil price shocks on stock returns: New evidence from a nonlinear perspective. Energy Economics, 86, 104–670.
Zhang, D., Lei, L., Ji, Q., & Kutan, A. M. (2019). Economic policy uncertainty in China’s commodity markets: Evidence from the crude oil market. Energy Economics, 80, 26–36.
Zhou, S., An, H., & Dai, Y. (2018). Oil price shocks, stock market returns and uncertainty: Evidence from China. Energy Economics, 72, 107–119.
 
 
  • Receive Date 12 May 2022
  • Revise Date 22 November 2022
  • Accept Date 02 March 2023
  • First Publish Date 02 March 2023
  • Publish Date 23 August 2025

Home

News

Guide for Authors

Submit Manuscript

Contact Us