Economic Research and Perspectives

Economic Research and Perspectives

Examining the Role of Institutional Quality in Moderating the Effects of Economic Policy Uncertainty on Economic Growth in Iran

Document Type : Original Research

Authors
Ali Sayehmiri 1
Javaher Latifi 2
Asma Shirkhani 3
Fahimeh Seyfi 4
Vahid Zarei 5
1 Associate Professor, Department of Economics, Faculty of Humanities, Ilam University, Ilam, Iran
2 Master’s Degree in Economics, Department of Economics, Khorramshahr University of Marine Science and Technology, Khorramshahr, Khuzestan, Iran
3 Ph.D. Candidate in Econometrics, Department of Economics, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran
4 Ph.D. Student, Department of Economics, Faculty of Humanities, Islamic Azad University Zanjan, Zanjan, Iran
5 Master’s Degree in Economics, Department of Economics, Faculty of Economic and Social Sciences, Bu-Ali Sina University, Hamedan, Iran
10.48311/ecor.2025.27946
Abstract
Abstract
Global policy uncertainty refers to situations in which economic decision-making faces significant challenges and the future of the economy becomes unpredictable due to various factors, such as global changes and policy fluctuations. This study examines the impact of institutional quality and global policy uncertainty on Iran’s economic growth from 1984 to 2021 using the discrete threshold regression model. The results show that Iran falls into two distinct institutional regimes, with a threshold level of 4.66. In the first regime, where institutional quality is below the threshold, an increase in global policy uncertainty has a negative and significant effect on economic growth. Conversely, in the second regime, where institutional quality exceeds the threshold, the negative effects of global policy uncertainty are moderated, and economic growth improves. The findings also indicate that the effects of globalization and physical investment on economic growth depend on the level of institutional quality. Under weak institutional conditions, globalization and physical investment positively influence economic growth, while institutional quality exerts a negative effect. However, once institutional quality surpasses the threshold, its positive effects on growth strengthen, and the impacts of globalization and physical investment improve. These findings underscore the importance of institutional reforms and improving institutional quality to reduce economic vulnerability and optimize the benefits derived from global opportunities. 
Aim and Introduction:
One of the fundamental challenges facing Iran’s economy in recent decades has been the simultaneous experience of economic policy instability and structural weaknesses in its economic institutions. Economic policy uncertainty (EPU), by reducing the ability to predict future outcomes, decreases investment incentives, weakens consumer expectations, and ultimately slows the rate of economic growth. In the economic literature, this uncertainty not only has short-term consequences but also influences the structure of production, trade, and investment in the long term.
Such uncertainty—especially in countries like Iran, which are exposed to both internal and external economic crises—can lead to reductions in gross domestic product (GDP), increases in unemployment, and declines in the quality of life. Despite the wide-ranging implications of uncertainty, the key question remains whether institutional structures can play a protective role against its adverse effects.
The institutional quality index (INS) is recognized as a key factor in facilitating or hindering economic processes. Strong institutions promote transparency, reduce corruption, and strengthen public trust, thereby moderating the negative effects of economic instability. Accordingly, this study analyzes the role of institutional quality in moderating the adverse effects of policy uncertainty on Iran’s economic growth from 1984 to 2021.
In addition, the study considers variables such as globalization and physical capital. Globalization—by expanding trade exchanges and facilitating technology transfer—can support economic processes and create opportunities for sustainable development. Physical capital (K), as one of the main factors of production and economic growth, particularly in infrastructure sectors, plays a fundamental role in mitigating instability and enhancing growth potential. Thus, this research seeks to provide a comprehensive picture of the factors influencing Iran’s economic growth and offer potential strategies to improve its economic performance.
Methodology:
Using the endogenous growth framework and employing the Discrete Threshold Autoregressive (TAR) regression method, this study analyzes the effects of explanatory variables on economic growth under two different institutional regimes. The threshold variable is the INS, calculated as the average of five key institutional indicators standardized to a range of 0 to 10.
Other independent variables include physical capital, the Economic Globalization Index (KOFGI), and the World Uncertainty Index (WUI). The annual data were obtained from reputable international sources, including the World Bank, the KOF Globalization Database, and the International Country Risk Guide (ICRG), covering the period from 1984 to 2021.
To ensure analytical accuracy, the study first applies the Augmented Dickey–Fuller (ADF) unit root test, followed by Pesaran’s cointegration test, and finally, the Brock–Dechert–Scheinkman (BDS) test to examine the existence of nonlinear relationships in the model. The results confirm cointegration among the variables and the presence of nonlinear relationships, justifying the use of a threshold model.
Results and Discussion:
The results of the threshold regression model indicate a threshold value of 4.66 for the INS. In the regime below this level, institutional quality exerts a negative and significant effect on economic growth, implying that inefficient institutions not only fail to support growth but may also hinder economic development. Conversely, when institutional quality exceeds the threshold, the coefficient becomes positive and significant, highlighting the constructive role of effective institutions in stimulating growth.
The WUI exhibits contrasting effects depending on the institutional regime. Under weak institutional conditions, its impact on growth is negative and significant; however, under strong institutional conditions, the effect turns positive. This finding underscores the protective capacity of robust institutions in mitigating external shocks and global instability.
Physical capital exerts a positive and significant effect in both regimes, though its impact is stronger under weak institutional conditions. This suggests that in the absence of efficient institutions, economic growth relies more heavily on the accumulation of physical capital. Similarly, the KOFGI has a positive effect in both regimes, but its influence is more pronounced in the strong institutional regime. Capable institutions enhance the productivity of global integration by facilitating foreign investment, improving the business environment, and increasing transparency.
Conclusion:
This study demonstrates that institutional quality in Iran not only serves as an independent determinant of economic growth but also plays a vital role in shaping the magnitude and direction of other macroeconomic variables. The identified threshold level delineates the boundary between institutional efficiency and inefficiency. Surpassing this threshold could mark a turning point, enabling Iran’s economy to better withstand policy and global fluctuations.
Therefore, strengthening economic governance, reducing corruption, enhancing transparency, and ensuring stability in policy decision-making should be prioritized by policymakers. Furthermore, aligning institutional reforms with globalization processes and promoting investment in physical infrastructure are complementary strategies for achieving sustainable economic growth. Ultimately, this research emphasizes that without fundamental institutional reforms, no economic policy can effectively and sustainably foster economic growth.
Keywords
Economic Growth
Economic Policy Uncertainty (EPU)
Institutional Quality (INS)

Subjects

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