Abstract
Economists have hypothesized that currency appreciation resulting from oil production in oil-rich countries can suppress the production of tradable goods, a phenomenon known as Dutch disease, often assessed using econometric models. This study leverages sanctions on Iranian oil exports, employing a quasi-experimental design with two distinct periods (1959–2020): one marked by sanctions (oil revenue recession) and the other by non-sanctions (oil revenue boom). The result shows a reversal of the Dutch disease effect during sanctions, leading to a real depreciation of the national currency and heightened production of tradable goods over non-tradable ones. The observed pattern of the real exchange rate aligns with Dutch disease dynamics, depreciating during sanctions and appreciating during non-sanction periods. Furthermore, the tradable sector exhibited increased share and real output growth compared to the non-tradable sector during the sanction period.
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Notes
To clarify, suppose that P and P* are the price index in domestic and foreign countries and E is the nominal exchange rate. The real exchange rate is defined by the P/EP*. Assuming the law of one price for tradable goods, the deviation of this ratio is mainly due to the deviation of the price index of non-tradable from tradable goods.
We ignore the subscript of \({E}_{{\mathrm{Rial}}/{\$}}\).
The value of oil exported of Iran during 1979–2019 has been $ 1370 B, in the same period of time the value of imported tradable goods $ 1364 B (Central Bank of Iran 2020a).
The average annual inflation rate in Iran is about 20%, while the average annual inflation rate in Iran’s trading partner countries such as Europe is about 1% (WDI, 2019). Therefore, it is reasonable to assume that foreign inflation is zero.
Central Bank of Iran (2020a).
Laudati and Pesaran (2021) estimate the sanctions’ intensity index from 2006 to 2020 on a quarterly data, according to the daily reports of popular newspapers.
Note that the effect of the event on the control group should not be just neutral, it can have a limited effect that is much less than the effect on the experimental group, or it can have the opposite effect. In this paper, we will see that sanctions in some cases have the opposite effect on the control group (non-tradable sector).
It should be noted that this estimated coefficient should not be compared with the DID in Table 3.
Society for Worldwide Interbank Financial Telecommunications.
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Doostkouei, S.G., Mousavi, M.H. & Karimi, M.S. Do oil sanctions reduce Dutch disease phenomenon? A quasi-experimental approach evidence from Iran. Int Econ Econ Policy 21, 385–410 (2024). https://doi.org/10.1007/s10368-024-00584-1
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DOI: https://doi.org/10.1007/s10368-024-00584-1