Analyzing the Asymmetric Effects of Oil Revenue Shocks and Latent Macroeconomic Factors on Main Groups of Consumer Goods and Services in Iran: A FAVAR Approach

Authors
vahid rezaei
| Mohammad Reza Lotfalipour
Seyed Saeed Malek sadati
Narges Salehnia
Abstract
The main objective of this study is to analyze the asymmetric effects of oil revenue shocks and the role of latent macroeconomic variables on the inflation of 12 major groups of consumer goods and services in the Iranian economy from 2009 to 2021. To this end, a Generalized Factor Augmented Vector Autoregression (FAVAR) model was employed, which facilitates the integration of extensive economic data and the extraction of latent nominal and real components.The findings indicate that the response of commodity group inflation to oil revenue shocks is inherently asymmetric. Positive oil revenue shocks trigger the Dutch Disease mechanism, leading to a rise in relative prices within non-tradable sectors such as healthcare, housing, and hospitality. Conversely, in the tradable goods sector, the temporary abundance of foreign exchange acts as a curb on price growth in the short term. On the other hand, negative oil revenue shocks exert severe inflationary pressure across all categories particularly import-dependent groups like food and transportation primarily through currency depreciation and structural budget deficits. Furthermore, the extracted latent components show a strong correlation with the nominal and real sectors; the first component (F1), representing the nominal sector, is the primary driver of inflation across most groups, while the second component (F2), representing the real sector (production and employment), plays a moderating role.

Keywords
Oil Revenue Shocks
Inflation
Latent Factors
Factor-Augmented VectorAutoregression (FAVAR
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