Document Type : Research Paper
Authors
1 PhD Student of Department of Economics and Management, Shiraz Branch, Islamic Azad University
2 Associate Professor of Department of Economics and Management, Shiraz Branch, Islamic Azad University, Shiraz, Iran
3 Assistant Professor Department of Economics, Institute for Humanities and Cultural Studies
Abstract
This paper aims to explain the real-fiscal linkages by identifying the macroeconomic determinants of the operational fiscal deficit in Iran from 1972 to 2020 using the Dynamic Ordinary Least Squares (DOLS) method. The findings indicate that economic growth, inflation, centralization, the size of the government in terms of efficiency, and the relative population of the employed have positive effects on the operational budget deficit in Iran. On the contrary, trade openness has had a negative effect. The common sense in economics regarding the positive effect of the budget deficit on inflation -primarily because it is often financed through money printing-, along with the key finding of this paper regarding the positive effect of inflation on the operational budget deficit, indicates the establishment of a “self-reinforcing vicious cycle” in Iran's economy. Based on this, the overall policy implication of this paper is in support of the government's “strict commitment” to budgetary discipline in conjunction with the design and implementation of a growth strategy based on fostering “human-capital-intensive” technological changes, a more open economy, more fiscal decentralization, minimizing government crowding-out and avoiding price distortions in factor markets, allowing the public sector to align with free market relative prices, and implementing comprehensive explicit complete indexation on both the fiscal revenues and expenditures sides.
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