Iranian Economic Review 2021, 25(2): 279-292 DOI: 10.22059/ier.2020.74559 RESEARCH PAPER Threshold Effects of Oil Revenues on Iran’s Growth Regimes: A Hybrid Threshold Markov Switching Model Haniyeh Sedaghat Kalmarzi a , Shahram Fattahi b,* , Kiomars Sohaili c a, b, c. Department of Economics, Faculty of Social Sciences, Razi University, Kermanshah, Iran Received: 06 July 2019, Revised: 27 August 2019, Accepted: 12 September 2019 © University of Tehran Abstract One of the significant issues studied in the oil-exporting countries has been to identify the relationship between oil and economic growth, and the nature of the relationship has been important for the economic policymakers of these countries. This study aims to investigate the effect of oil revenues on Iran’s economic growth over the period 1971-2017. For this purpose, the threshold effects of oil revenues on economic growth regimes are modeled using a hybrid threshold Markov switching model. The results from the model estimation indicate that oil revenue has a nonlinear and threshold effect on Iran’s economic growth regimes in which as long as oil revenues have a share less than 16.3% in GDP, oil revenues have a positive effect on growth but after exceeding this threshold, oil rents had a negative and significant effect on economic growth. The results also imply that Iran’s economic growth has two regimes, namely the high-growth regime and the low-growth regime, in which the fluctuations in the high-growth regime are more than that in the low-growth regime. Keywords: Oil Rents, Economic Growth, Hybrid Threshold Markov Switching Model. JEL Classification: Q30, O47, O53, C24. Introduction The abundance of natural resources in some countries has had different and sometimes adverse effects on the process of the country’s economic development. In traditional theories, the abundance of natural resources as a productive input can expedite the process of economic growth. In some countries, such as the United States, Norway, and Canada, these resources have accelerated economic growth. However, for many other countries, this is not the case, and not only this privilege has not contributed to the economic growth and development, but also in some cases has led to retardation in this process (Gylfason, 2001). In response to the question of why some countries with the abundance of the natural resource have not been able to pursue economic development and suffer from many economic problems, the resource curse hypothesis has arisen. According to this hypothesis, the dependence on revenues from the export of natural resources may lead to the strengthening of renting processes, the government’s financial independence from the domestic economy, rising government expenditures, weakening democracy, severe fluctuations and instability, lack of transparency, and government inefficiency. Some other problems also may arise such as disregarding the improvement in the quality of human capital, the inefficient allocation of oil rents and the destruction of institutions in these societies, leading to the weak economic performance of these countries (Zamanzadeh and Alhoseini, 2012; Karimi, 2015). *. Corresponding author email: sfattahi@razi.ac.ir