Abstract

This paper attempt to estimate the natural gas demand function in Industry Sector of Iran for the period 1971 to 2009 using a regime-switching model entitled Smooth Transition Auto-regression model (STAR). To this end, explanatory variables such as value added of industry sector, real price of natural gas, real price of oil products, and real price of electricity are employed as variables influencing natural gas consumption in industry sector of Iran. The results show that natural gas demand in industry sector follows an LSTR1 model as a two-regime nonlinear model if real price of oil products is assumed as transition variable. The estimation results show that the slope parameter equals a high value of 10 and the threshold extreme value stands at 50.29 Rials per each liter of oil products consumed (Note 1). The results also indicate that in both regimes, value added of industry sector and real price of electricity have a positive and significant relation, and real price of natural gas has a reverse and significant relation with natural gas demand in industry sector. Further, real price of oil products does not have any significant relation with natural gas demand.

 

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