Investigating the threshold effects of public debt on inflation; with smooth transition regression (STR) approach

Document Type : Original Article

Author

Ph.D. in Public Sector Economics, Faculty of Economics and Entrepreneurship, Razi University

Abstract

Providing resources in the form of debt from domestic and foreign sources aims to fill the gap between savings and investment. But not paying attention to debt and its role in the process of economic stability may lead to the effects of bad debt on inflation and affect economic stability. Considering that Iran is an oil-exporting country and its budget is heavily dependent on oil revenues, the unsustainability of debt and the ever-increasing growth of the volume of debts in Iran's economy can lead to spending the revenues from exports to repay debts. To be invested. Therefore, in order for the government to be able to reduce the risk of debt crises in the future, it should try to diversify the economy and sources of income and reduce the dependence of the budget on oil revenues. Due to recent events such as oil sanctions, reduction in oil prices and the government's oil revenues, stagnation in various economic sectors has caused more attention to be paid to the issue of government debt.The present study investigates the threshold effects of public debt on the inflation rate in Iran's economy using the Smooth Transition regression model during the period 1973 to 2021. The results of the estimation of the model show that the variables of economic growth, investment, money supply and trade openness are significant and have a positive effect on the inflation rate in Iran. The results also confirm the existence of a negative relationship between the government debt rate and trade openness with the inflation rate. The estimation results of the nonlinear part of the model (second regime) show that the variables of public debts, trade openness and money supply have positive effects on the inflation rate. Also, the economic growth and investment variables have a negative relationship with the inflation rate. Regarding public debts, it should be said that the accumulation of government debts will lead to borrowing from the central bank, increasing bank liabilities and debts, increasing the money supply, and ultimately increasing the inflation rate.

Keywords

References

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Public Sector Economics Studies
Volume 2, Issue 4
February 2024
Pages 353-372

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History

  • Receive Date: 17 July 2023
  • Revise Date: 12 September 2023
  • Accept Date: 12 September 2023

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