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Economic theories suggest that increasing uncertainty induces households to reduce the growth of their consumption expenditure. This study aims to examine how to change the consumption expenditure of Iranian households due to uncertainty in government expenditure. To do this, using annual data for 1978-2012, first, a measure for government expenditure uncertainty was introduced, and then its effects on household consumption behavior were analyzed. The results indicate that uncertainty in government expenditure has a negative and significant effect on growth of household consumption expenditure. On the other hand, the effect of government spending uncertainty on consumption expenditure of durable goods is positive. In other words, Iranian households in increasing uncertainty settings face with the growth of consumption spending on durable goods. Thus, the government needs to create transparency in fiscal policy, to reduce policy uncertainty for households as far as possible.

Keywords: Government Expenditure, Uncertainty, Consumption, Time-varying volatility

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