The Nonlinear effect of government size on inflation in Iran: Markov-Switching Approach

Document Type : Original Article

Authors

1 Assistant professor Professor of Economics ,Department of Economics, Faculty of Humanities, Ayatollah Boroujerdi University, Boroujerd, Iran.

2 Associate Professor of Economics ,Department of Economics, Faculty of Humanities, Ayatollah Boroujerdi University, Boroujerd, Iran.

3 Ph.D. in Economics, Faculty of Management and Economics, Lorestan university, Khorramabad, Iran

Abstract

The current research has investigated the effect of government size on Iran's inflation during the period of 1981-2021

using the Markov switching approach. The findings show that in both high inflation and low inflation regimes, government size has a positive and significant effect on inflation, with the difference that the effect of government size on inflation is greater in the high regime than in the low regime. In Iran's economy, the increase in government spending leads to an increase in government borrowing and a net increase in the government's debt to the central bank, which leads to an increase in liquidity through the monetary base and ultimately to an increase in inflation. Financing the government's expenses through the sale of oil and the conversion of foreign currency income into Rials is another channel that increases the monetary base and inflation. On the other hand, along with the increase in government spending, due to inefficient policies and government administration in the country, with the transfer of resources from the private sector to the public sector and the government's entry into non-productive projects, the social and private costs of production increase. They find that it leads to an increase in the country's inflation through the reduction of economic production. According to the findings, in the high inflation regime, the intensity of the effect of government size on inflation is greater than in the low inflation regime. Because in the high inflation regime, an increase in the general level of prices is accompanied by an increase in economic uncertainty, which in turn leads to a decrease in investment and ultimately a decrease in economic growth; A decrease in economic growth along with high inflation means a decrease in the government's real income, which exacerbates the increase in government spending and the budget deficit in the conditions of oil sales and an increase in the government's debt to the central bank.

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References

 
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History

  • Receive Date: 11 July 2024
  • Revise Date: 10 October 2024
  • Accept Date: 13 October 2024

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