The Determinants of Economic Growth in Iran Based on Bayesian Model Averaging

Abstract

This paper identifies the key determinants of economic growth in Iran, using annual time series data from 1974 to 2010. There is a very large literature on determinants of economic growth and several studies have included a large number of explanatory variables. Empirical models of economic growth are therefore plagued by problems of model uncertainty concerning the choice of explanatory variables and model specification. We utilize Bayesian Model Averaging (BMA) to resolve these model uncertainties. The results of this study indicate that the ratio of oil revenue to GDP is the most important variable affecting economic growth in the Iranian economy. Also the second and third effective variables on growth are respectively the ratio of imported capital and intermediate goods to GDP and labor force which lead to an increase in growth. Endogenous growth factors which are the factors contributing to the formation of human capital, not possess a large role in growth process. Therefore, the nature of Iran's economy has not endogenous and dynamic features and predominantly, economic growth has been made by injecting of exogenous sources (oil revenue, imported capital and intermediate goods, and labor force). JEL classifications: C11, H51, O10, O40.

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