Operational Risk, Climate Change, and Economic Growth in Iran

Amani, Ramin; Ahmadzade, Khaled; Habibi, Fateh

doi:10.48308/jep.4.2.301

Operational Risk, Climate Change, and Economic Growth in Iran

Document Type : Original Article

Authors

¹ M.Sc. in Economics, Department of Economics, University of Kurdistan, Sanandaj, Iran.

² Associate Professor, Department of Economics, University of Kurdistan, Sanandaj, Iran.

10.48308/jep.4.2.301

Abstract

Economic growth is one of the most critical goals in all countries. Economic growth can enhance public welfare, reduce poverty, and alleviate unemployment. Knowing the factors affecting economic growth is essential, but recognising the obstacles can be more critical and practical. Iran is constantly exposed to various risks due to its location in one of the world's most significant and turbulent regions, the Middle East. On the other hand, Iran's hot and arid geographical location has led this country to be directly influenced by climate change. The main objective of the present research is to investigate the effect of operational risk and climate change on economic growth in Iran from q1:2014 to q4:2021 using the time-varying parameter vector autoregression (TVP-VAR). The research results reveal that any operational risk improvement positively affects Iran's economic growth. Furthermore, international sanctions have a significant impact on operational risk and, thus, a negative effect on economic growth in Iran; Therefore, it is suggested to Iranian policymakers to alleviate international tensions, especially with the influential countries in the global economic scene, to improve the operational risk, increase foreign investments, enhance the business environment, reduce the cost of business transactions and accordingly, increase the economic growth and development of the country. On the other hand, the climate change crisis has had an adverse effect on economic growth in Iran. It is thus suggested that policymakers consider climate change as a critical and urgent issue in legislation.

Keywords

References

Ahir, H., Bloom, N., & Furceri, D. (2019). The global economy hit by higher uncertainty, VoxEU.org.

Akadiri, S. S., Eluwole, K. K., Akadiri, A. C., & Avci, T. (2020). Does causality between geopolitical risk, tourism and economic growth matter? Evidence from Turkey. Journal of Hospitality and Tourism Management, 43, 273-277. https://doi.org/https://doi.org/10.1016/j.jhtm.2019.09.002

Akao, K. I. & Sakamoto, H. (2018). A theory of disasters and long-run growth. Journal of Economic Dynamics and Control, 95, 89–109.

Babatunde, M. A., & Adefabi, R. A. (2005). Long-run relationship between education and economic growth in Nigeria: Evidence from the Johansen’s cointegration approach. Education in West Africa: Constraints and Opportunities.

Bakkensen, L., & Barrage, L. (2016). Do disasters affect growth? A macro model-based perspective on the empirical debate. Working paper. Brown University.

Barker, T. (2001). Representing the integrated assessment of climate change, adaptation and mitigation, Tyndall Centre Working Paper, 11.

Barro, R. (2015). Environmental protection, rare disasters and discount rates. Economica, 82, 1–23.

Bloom, N. (2009). The impact of uncertainty shocks, Econometrica, 77(3), 623-685.

Bredin, D., & O’Reilly, G. (2004). An analysis of the transmission mechanism of monetary policy in Ireland. Applied Economics, 36(1), 49-58. https://doi.org/10.1080/0003684042000177198

Brunnermeier, M. K., & Pedersen, L. H. (2009). Market liquidity and funding liquidity, The Review of Financial Studies, 22(6), 2201–2238.

Carter, C. K., & Kohn, R. (1994). On gibbs sampling for state space models. Biometrika, 81(3), 541–553. https://doi.org/10.2307/2337125

Danielsson, J, Shin, H. S., Zigrand, J. P. (2009). Modelling financial turmoil through endogenous risk, VoxEU.org.

Daníelsson, J., Valenzuela, M., & Zer, I. (2022). How global risk perceptions affect economic growth, VoxEU.org

de Jong, D. J., & de Jonge, V. N. (1995). Dynamics and distribution of microphytobenthic chlorophyll-a in the Western Scheldt estuary (SW Netherlands). Hydrobiologia, 311(1), 21-30. https://doi.org/10.1007/BF00008568

Del Negro, M., & Otrok, C. (2008). Dynamic factor models with time-varying parameters: measuring changes in international business cycles, Staff Reports 326, Federal Reserve Bank of New York.

Dell, M., Jones, B. F., & Olken, B. A. (2012). Temperature shocks and economic growth: Evidence from the last half-century. Am. Econ. J. Macroecon., 4(3): 66–95. doi: https://doi.org/10.1257/mac.4.3.66.

Dinh, T. T.-H., Vo, D. H., The Vo, A., & Nguyen, T. C. (2019). Foreign direct investment and economic growth in the short run and long run: empirical evidence from developing countries. Journal of Risk and Financial Management, 12(4), 176. https://www.mdpi.com/1911-8074/12/4/176

Durbin, J., & Koopman, S. J. (2001). Time series analysis by state space methods.

Durbin, J., & Koopman, S. J. (2002). A simple and efficient simulation smoother for state space time series analysis, Biometrika, 89(3), 603–615. http://www.jstor.org/stable/4140605

Ferreira, J. J. M., Fernandes, C. I., & Ferreira, F. A. F. (2020). Technology transfer, climate change mitigation, and environmental patent impact on sustainability and economic growth: A comparison of European countries. Technological Forecasting and Social Change, 150, 119770. https://doi.org/https://doi.org/10.1016/j.techfore.2019.119770

Frühwirth-Schnatter, S. (1992). Data augmentation and dynamic linear models. Forschungsberichte / Institut für Statistik, 28. Department of Statistics and Mathematics, WU Vienna University of Economics and Business, Vienna.

Ge, M., Kannaiah, D., Li, J. et al. (2022). Does foreign private investment affect the clean industrial environment? Nexus among foreign private investment, CO2 emissions, energy consumption, trade openness, and sustainable economic growth. Environ Sci Pollut Res. https://doi.org/10.1007/s11356-022-18814-x

Hansen, B. (1992). Testing for parameter instability in linear models. Journal of Policy Modeling, 14(4), 517-533. https://EconPapers.repec.org/RePEc:eee:jpolmo:v:14:y:1992:i:4:p:517-533

Harris, R., S. Robert, and R. Harris (eds). (2003). Applied time series modelling and forecasting. Chichester: John Wiley and Sons.

Harvey, D. (1989). From managerialism to entrepreneurialism: the transformation in urban governance in late capitalism. Geografiska Annaler. Series B, Human Geography, 71(1), 3–17. https://doi.org/10.2307/490503

Heydari Heratmeh, M. (2022). Investigating the impact of corruption on investment and economic growth. Scientific Quarterly Journal of Iranian Islamic Development Model Studies. Article in progress.

Hideg, E., Kiss, E., Nováky, E., Vag, A., Alács, P., Kristóf, T., Veigl, H., Neszveda, G., & Xin, F. (2022). Futures Studies in the Interactive Society.

Hylleberg, S., Engle, R., Granger, C., & Yoo, B. S. (1990). Seasonal integration and cointegration. Journal of Econometrics, 44(1-2), 215-238.

Ikefuji, M., & Horii, R. (2012). Natural disasters in a two-sector model of endogenous growth. Journal of Public Economics, 96, 784–796.

IPCC (2007). Climate Change 2007—The physical science basis. Intergovernmental panel on climate change, Cambridge University Press. https ://www.ipcc.ch/repor t/ar4/wg1

IPCC (Intergovernmental Panel on Climate Change) (2007a). Climate Change 2007. The Physical Science Basis. The Intergovernmental Panel on Climate Change. Cambridge, UK: Cambridge University Press.

Kahn, M. E., Mohaddes, K., Ng, R. N. C., Pesaran, M. H., Raissi, M., & Yang, J.-C. (2019). Long-term macroeconomic effects of climate change: a cross-country analysis. National Bureau of Economic Research, 2019. https://doi.org/10.3386/w26167

Kim, C. and Nelson, C. (1999). State-space models with regime-switching: classical and gibbs-sampling approaches with applications. MIT Press, Cambridge, Massachusetts.

Kompas, T., Pham, V. H., & Che, T. N. (2018). The effects of climate change on GDP by country and the global economic gains from complying with the Paris climate accord. Earth's Future, 6(8), 1153-1173.

https://doi.org/https://doi.org/10.1029/2018EF000922

Korobilis, D. (2013). Assessing the transmission of monetary policy using time-varying parameter dynamic factor models. Oxford Bulletin of Economics and Statistics, 75(2), 157-179. https://doi.org/https://doi.org/10.1111/j.1468-0084.2011.00687.x

Lecocq, F., & Shalizi, Z. (2007). How might climate change affect economic growth in developing countries? a review of the growth literature with a climate lens. Policy Research Working Paper; No. 4315. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/7260 License: CC BY 3.0 IGO.

Liu, P., Peng, Y., Shi, Y., & Yang, J. (2021). Financial structures, political risk and economic growth. The European Journal of Finance, 1-21. https://doi.org/10.1080/1351847X.2021.1879888

MalekoutiKhah, Z., & Farajzadeh, Z. (2020). The effect of climate change on Iran’s economic growth. Agricultural Economics and Development, 34(2), 223-238. (In Persian)

Mankiw, N. G., Romer D., & David W. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107(2), 407-437.

Meyer, D. F., & Mothibi, L. (2021). The effect of risk rating agencies decisions on economic Growth and investment in a developing country: the case of South Africa. Journal of Risk and Financial Management, 14(7), 288. https://www.mdpi.com/1911-8074/14/7/288

Müller-Fürstenberger, G., & Schumacher, I. (2015). Insurance and climate-driven extreme events. Journal of Economic Dynamics and Control, 54, 59–73.

Noferesti, A., Ahmadi Shadmehri, M. T., Razmi, M. J., & Noferesti, M. (2018). The effect of inequality on growth through the human capital channel: A case study of Iran. Strategic and macro policies, 6(24), 618-643. (In Persian)

Nordhaus, W. D. (1991). To slow or not to slow: The economics of the greenhouse effect, Economic Journal, 101(407), 920-937.

Panahi, H., & Ismail Darjani, N. (2020). Investigating the effect of global warming and climate change on economic growth (case study: Iranian provinces during 2001-2011). Environmental Science and Technology Quarterly, 22(1), 79-88. (In Persian)

Primiceri, G. E. (2005). Time varying structural Vector Autoregressions and monetary policy. The Review of Economic Studies, 72(3), 821-852. https://doi.org/10.1111/j.1467-937X.2005.00353.x

Rahman, M. M., Saidi, K., & Mbarek, M. B. (2020). Economic growth in South Asia: the role of CO2 emissions, population density and trade openness. Heliyon, 6(5), e03903. https://doi.org/https://doi.org/10.1016/j.heliyon.2020.e03903

Rezagholizadeh, M., & Rajabpour, H. (2021). Financial stress, political risk, and economic growth: New evidence from Iran. Scientific Quarterly Journal of Economic Growth and Development Research, 12(45). (In Persian)

Sajjadieh Khajoi, F., Bakhtiari, S., & Ghobadi, S. (2021). Evaluating the effect of country risk on the economic growth of selected member countries of the Organization of Islamic Cooperation. Scientific Journal of Planning and Budget, 26(3), 101-130. (In Persian)

Sajjadieh Khajoi, F., Bakhtiari, S., & Ghobadi, S. (2021). Evaluating the impact of household preparedness against risk on Iran’s economic growth. Applied Economics, 11(37), 21-35. (In Perisan)

Salehi Kemroudi, M., & Abunouri, I. (2020). The impact of climate change on Iran’s economic growth. Environmental Science Studies, 4(3), 1614-1622. (In Persian)

Săvoiua, G., & Ğaicu, M. (2014). Foreign direct investment models, based on country risk for some post-Socialist Central and Eastern European Economies. Procedia Economics and Finance, 10, 249–260.

Shahabadi, A. (2002). Private sector capital stock and endogenous growth (case study of Iran). Useful Letter, 8(31), 101-122. (In Persian)

Sun, C., Abbas, H. S. M., Xu, X., Gillani, S., Ullah, S., & Raza, M. A. A. (2021). Role of capital investment, investment risks, and globalization in economic growth. International Journal of Finance & Economics, 28 (2), 1883-1898.

https://doi.org/https://doi.org/10.1002/ijfe.2514

Tehrani, R., Seraj, M., Foroush Bastani, A., and Falahpour, S. (2020). Evaluation of the effect of systemic risk of the banking sector on the performance of the macro economy of Iran. Financial Research, 22(3), 297-319. (In Persian)

Wang, Q., Dong, Z., Li, R., & Wang, L. (2022). Renewable energy and economic growth: New insight from country risks. Energy, 238, 122018.

https://doi.org/https://doi.org/10.1016/j.energy.2021.122018

West, M., & Harrison, J. (1997). Bayesian forecasting and dynamic models (2nd ed.). Springer-Verlag.

Zareh, M. H., Ansari Samani, H., Namdari, S., & Mahmoudi, Z. (2021). The effect of economic, political, and financial risk on capital flight: A dynamic panel approach. Modern Economics and Business, 16(1), 95-127. (In Persian)

https://www.fitchsolutions.com/

https://data.worldbank.org/indicator

https://www.ilo.org/

https://www.iea.org/