According to Barro–Ricardo theorem, government budget deficit has not an effect on the consumption. Inspired by the theory of life cycle and permanent income, they believe that, since the government finances the budget deficits through issuing bonds, in future government will offset it by increasing taxes. Therefore, the consumption does not change. In this paper we test this theory and get positive result by estimating the consumption function of Iran. In Iran budget deficit is usually financed by expansion of liquidity through borrowing from central bank or by selling foreign currencies and not by issuing bonds. Therefore the budget deficit in Iran will remain neutral as a result.

Keywords: Iran, Budget deficit, Consumption function, Ricardo-Barro

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