Asymmetric Oil Revenues Fluctuations, Government Budget Deficits, and Exchange Rate Volatility under Sanctions: NARDL–TGARCH Evidence from Iran

Document Type : Research Paper

Authors

1 Assistant Professor of Economics, Faculty of Economics and Politics Sciences, Shahid Beheshti University

2 Master of Economics, Faculty of Economics and Political Science, Shahid Beheshti University, Tehran, Iran

10.22111/ijbds.2026.48246.2098

Abstract

Exchange rate volatility has significant implications for trade, investment, and employment. Consequently, managing exchange rate fluctuations remains a major challenge for economic policymakers, making it essential to identify their underlying determinants. Given the substantial contribution of oil revenues to Iran's export earnings, foreign exchange receipts, and government budget financing, this study investigates the effects of asymmetric oil revenue fluctuations and government budget deficit growth on exchange rate volatility under severe economic sanctions. The analysis employs a combined NARDL–TGARCH framework using quarterly data for the period from 2011:Q4-2021:Q1. The empirical findings indicate that oil revenue fluctuations, government budget deficit growth, and severe economic sanctions have significantly increased exchange rate volatility in both the short run and the long run. The results further reveal that the impact of oil revenue fluctuations is asymmetric in the short run but becomes symmetric in the long run. Moreover, severe sanctions intensify exchange rate volatility by amplifying fluctuations in oil revenues and accelerating government budget deficit growth. Conversely, improvements in government effectiveness and stronger economic growth contribute to reducing exchange rate volatility.

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