Showing 7 results for Budget Deficit
Dr Soheil Roudari, Dr Hamidreza Maghsoudi, Dr Farzaneh Ahmadian-Yazdi,
Volume 0, Issue 0 (12-2024)
Abstract
Aim and Introduction
One of the most important issues in Iran's economy is related to managing the exchange rate, inflation and budget deficit. During tightening of the sanctions, the oil revenues are limited which potentially leads to an increase in the budget deficit as well as a decrease in the currency supply which accelerates the exchange rate. On the other hand, with the increase in the budget deficit, the probability of borrowing from the banking system and also the issuance of bonds increases, which in turn rise the monetary base and liquidity. In addition, inflationary expectations also increase, which can be effective in improving assets prices. With an increase in inflation, based on the inflation-currency spiral, there is a possibility of a grow in exchange rate in order to maintain the competitiveness of domestic production. This can accelerate the price of imported commodities and cause domestic inflation again. With the increase in inflation and households spending, nominal wages will have a higher growth compared to normal conditions in order to maintain minimum purchasing power, which can again face the government with limited resources and more borrowing to meet current expenses. From the monetarists’ point of view and the classical economics, in general, the main stimulator in increasing inflation is the growth of money and liquidity. However, from the post-Keynesian economists’ point of view, inflation increases the demand of money and subsequently liquidity. On the other hand, with an increase in the exchange rate, the government's expenses usually increase more than its income, which can lead to an increase in the government's budget deficit. Also, considering the existence of a monopoly in currency supply by the central bank, the hypothesis of using currency exchange revenues (the difference between free and budget-approved currency) will be applicable and this issue can raise the impact of the budget deficit on the exchange rate. Therefore, there has always been a serious challenge among economists as well as macroeconomic decision-makers about the connectedness between macroeconomic variables. What is the main driver of the network between macro variables? Is there a different way of communication in different thresholds of their growth rate? These cases show that it is very important to examine the time-varying interrelationships between these macroeconomic variables.
Accordingly, there is a complex connection between exchange rate, inflation, budget deficit and liquidity, which can be varied in different years. Therefore, in this research, using the TVP-TVAR technique, the time-varying connectedness across exchange rate, inflation, budget deficit and liquidity is examined during March, 2006 to August, 2023.
Methodology
In the current research, the relationship between exchange rate fluctuations, inflation, government budget deficit and liquidity based on monthly data using the TVP-TVAR technique is investigated. It should be noted that all the required information is extracted from the economic indicators of the central bank, and the government's budget deficit data from 2017 onward are extracted from Iran's Program and Budget Organization.
Findings
The results show that exchange rate and liquidity are, respectively, the largest net transmitter of volatilities in the network. Moreover, inflation rate and government budget deficit, respectively, are the largest net receivers of shocks from network. On average, the TCI is 23%, and more than 70% of this interrelationship between variables is explained by other factors such as political ones. Moreover, if the variables underestimated grow up to 36% annually (3% monthly), the connection between them will be cut off. In the conditions of decreasing the growth rate of variables up to -3% per month, the exchange rate has played a dominant role and its volatilities are transferred more strongly to inflation rate and less strongly to the budget deficit and liquidity.
If the growth rate of the variables is up to 24% annually (threshold of +2% monthly growth rate), the exchange rate volatilities are transferred to inflation and no interconnectedness between other variables is observed.
Discussion and Conclusion
Our results show that, on average, the total connectedness index from 2012 to 2016 has been upward, which is caused by the tightening of sanctions and the increase in inflationary expectations, psychological factors and emotions. Moreover, the connectedness between them is increased in 2018 and 2019, which is related to the intensification of sanctions and the reduction of currency supply and the increase in inflation and budget deficit and subsequently the increase in the issuance of debt securities in the capital market in order to manage the budget deficit and as a result increase liquidity. The results show that exchange rate is a main net transmitter of volatilities in most years and the inflation rate is a main net receiver of volatilities in many years. From 2016 onwards, the budget deficit is the net receiver of shocks from network in most periods, except for one period in 2019. It is interesting to note that in 2019, with the increase in the budget deficit and the issuance of debt securities, the budget deficit is transmitter, liquidity is receiver and inflation is more receiver variable than liquidity in the network. Totally, the results show that exchange rate is the major net transmitter of shocks to other macro variables.
Moreover, based on the results of the sensitivity analysis and thresholds effect, if the growth rate of variables is up to 24% annually (threshold of +2% monthly growth rate), the exchange rate fluctuations will be transferred to inflation and no connection between other components is observed. This shows that the macroeconomic management of the economy is very sensitive to the growth rate of the thresholds of the macroeconomic components, and before the political economy and also the factors of expectations and emotions dominated the economy, the macroeconomic management, especially the exchange rate, is required. Otherwise, it is impossible to manage the investigated variables with monetary and fiscal policies. Therefore, the managed floating exchange rate should be taken into consideration and if the goal is to manage the network using macroeconomic theories, the variables should not be allowed to increase by more than 24% annual growth. Other factors such as the political economy, and especially inflationary expectations will get the dominant role in the economy
Yeganeh Mousavi Jahromi, Ayat Zayer,
Volume 8, Issue 3 (10-2008)
Abstract
Budget deficit and ways of its financing,have different economic implications.The private consumption as one of the major components of the aggregate demand alongside with the private investment are also under the effects of the deficit.The total effects of the deficit can be separated into the primary and secondary effects.The primary effects of the defict is attributed to the causes of the deficit,while the secondary effects is related to the ways of deficit financing.The final effect is the sum of these two effects,which might be positive,negative or zero.The results of the study by the ARDL approach for the time period of 1342-1384 indicates that although the effect of the deficit on private consumption is positive but there is no longrun relationship between them.On the other hand effects of the deficit on private investment is negative.These results also show that the effects of the deficit on investment may last or endure for a long time and therefore it can be said that there is a longrun relationship between deficit and private investment.
Sohrab Delangizan, Kiomars Sohaili, Elaha Khalooei,
Volume 11, Issue 1 (5-2011)
Abstract
By a transient glance at the Iranian government budget, it is found that in almost all years, a large amount of the Iranian government budget deficit is provided by issuing money. Money issuing through inflation and real economic growth, leads to increased revenue for the government. Through increasing the general level of prices and decreasing the purchasing power it leads to the concept of “inflation tax” which is taken from people without their awareness. By real economic growth, more real balance will be demanded for transaction of additional production. In such a condition, the government by paying credit money takes the possession of the goods and services which have inherent value. Regarding the importance of growth in macroeconomic discussions, in this study, the relationship between seigniorage and per capita income growth by using econometrics models has been analyzed. Using time series data for 1966 – 2007 the econometric models have been estimated through CLS approach and threshold level of seigniorage is assessed. The results show that seigniorage has meaningful and negative effect on the economic growth at more than 3.5% but its effect on economic growth less than 3.5% is neutral.
Mohammad Reza Monjazeb,
Volume 11, Issue 2 (8-2011)
Abstract
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.
Seyed Amir Azimi, Mohammad Noferesti,
Volume 15, Issue 2 (6-2015)
Abstract
In this study, to find the relationship between the government budget deficit and trade balance in Iran, a structural macro-econometric model is set up. In the model, government consumption expenditure increased by 20 percent annually during 2001-2010, so the government budget deficit increased relative to the baseline. The financing methods of budget deficit and relevant effects on trade balance were analyzed in 4 options. The results indicate that government budget deficit increases by adopting expansionary fiscal policy in all options. If the budget deficit is financed by borrowing from the central bank (the first option), it will raise the monetary base and finally worsen the trade balance and non-oil trade balance compared to the baseline. If the budget deficit is financed by selling participation bonds to the public (the second option), it will reduce aggregate demand and finally improve the trade balance and non-oil trade balance compared to the baseline. If direct taxes and government spending are increased by the same amount (the third option), private consumption will decrease; and trade balance and non-oil trade balance will be deteriorated compared to the baseline. Finally, if the budget deficit is financed by the withdrawal of foreign currency reserves (the fourth option), oil revenues will increase, as a result the trade balance will be improved and the non-oil trade balance will be exacerbated compared to the baseline.
Mehdi Hajamini, Mohammad Taher Ahmadai Shadmehri, Mohammad Ali Falahi, Ali Akbar Naji Meidani,
Volume 16, Issue 4 (12-2016)
Abstract
The government of Iran has faced with budget deficits during 1979 – 2010, which has been financed mainly through money creation. Theoretically, the impacts of budget deficit and inflationary tax on macroeconomy are very controversial, so that both decrease and increase in consumption, investment, net exports and total expenditure have been supported by empirical researches. Using structural cointegrating vector autoregressive, this paper investigates the impacts of inflationary finance on the demand side of Iran’s economy during mentioned period. Budget deficit is defined as the difference between operating budget deficit (minus net operating balance) and capital balance surplus, or net lending (net acquisition of nonfinancial assets). The results show that both operating budget deficit and net lending have positive impacts on consumption, investment and net imports in the short run. So changes in the demand side have not necessarily same orientation with increase or decrease in budget deficits, but the source of change in budget deficit determines its effects. Reducing budget deficits through positive shock to net lending and a policy of increasing operating budget deficit have similar effects. Furthermore, the results show that the operating budget deficit has no effect on demand components in the long run. The complementarity of inflationary tax and financial repression is confirmed in both short run and long run. In addition, the results indicate that an increase in operating budget deficit and/or net lending induce more inflationary tax and financial repression. Although the budget deficit has no effect on demand side in the long run, but its two outcomes -inflationary tax and financial repression- have opposite effects on the consumption, investment and net imports in both short run and long run.
Dr Seyed Hadi Mousavinik, Dr Sholeh Bageripormehr,
Volume 19, Issue 1 (4-2019)
Abstract
Lack of reliable statistics relating to government debts in Iran's economy, not only has it influenced on the optimal management of resources and debt, but it has been one of the most important factors affecting the lack of theoretical and experimental literature in this field in Iranian economy; Somehow that he existence of extensive international literature in world, has led to very limited studies in Iran. In this study, the time series of government debt are calculated in four ways. Furthermore, this article has two ways to calculate the optimal ratio of government debt to gross domestic product, and then estimate financial space in Iran economy. In first way, without time series of government debts and based on a simple model this proportion was estimated at 15%. Despite the advantage of this method of not using the time series of debt due to the adoption of some assumptions that are inconsistent with the conditions of the Iranian economy, we cannot accept it easily. Therefore, the second method was investigated, in which first government debt series has been set up and then, using a smooth transition regression, the government's debt ratio was extracted which was 19 percent. Estimates performed in two ways, the highest government debt ratio has been experienced and the ratio of government debt that leads to negative economic growth, show that the government has a fiscal space to 30 or 32 percent of the government debt to GDP ratio.
