One of the most important aspects of vulnerability of the Iran economy can be observed in depreciation of real exchange rate during the oil booms. This phenomenon is called "Dutch disease". In other words when a country starts exporting natural resources, the ensuing capital inflows lead to an increase in demand. The real exchange rate (RER) typically appreciates due to “spending effect” as the price of domestic nontradables increases relative to the price of tradables. The main objective of this paper is to examine the cyclical patterns of the house price and macroeconomic variables in Iran. Using Hodrick and Prescot filtering method, the cross-correlation analysis is first presented to identify the long-run behavior of the variables. Then based on the vector autoregressive (VAR) model, we investigate the interaction between housing price cycles and cyclical component of real oil revenue, real exchange rate, real GDP, money supply and interest rate. The results show that positive oil shocks, leads to an increase in housing price cycles.

Keywords: Housing price cycles, Vector Auto Regressive, Hodric and Prescot Filter

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