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The Relationship between Budget Deficit and Inflation in Iran

  • Jamaleddin Mohseni Zonuzi

    (Assistant professor; Department of Economics, Urmia University)

  • Mahnaz S.Hashemi Pourvaladi

    (Graduate student; Department of Economics, Urmia University)

  • Nasrin Faraji

    (Graduate student; Department of Economics, Urmia University)

Registered author(s):

    Government budget deficit has been one of the topical issues in the country’s historical economic problems. The budget deficit-inflation relationship is not always obvious and it is different between countries. Since government of Iran has consistently run its economy with a budget deficit and high inflation, this paper re-investigate the deficit-inflation nexus in the Iranian economy by using quarterly data for the period of 1990:1-2007:4. To cary out a test of no structural break against an unknown number of breaks in the Iranian macroeconomic variables, we use the endogenously determined multiple break test developed by Bai & Perron (2003). As, there is a structural break in the time series date, we use Perron(1990) unit root test to test of stationarity. We employ Bounds test approach to cointegration proposed by Pesaran et al. (2001) to investigate the long-run relationship between budget deficit and inflation. The key findings from the empirical studies investigating the relationship between the budget deficit and inflation indicated strong evidence towards supporting a significant and positive relationship between budget deficit and inflation in Iran. At the end, we obtained volatility of budget deficit by using GARCH model, and showed that, volatility of budget deficit has a positive effect on the inflation too.

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    Article provided by Economics faculty of Tehran university in its journal Iranian Economic Review.

    Volume (Year): 16 (2011)
    Issue (Month): 1 (winter)
    Pages: 117-133

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    Handle: RePEc:eut:journl:v:16:y:2011:i:1:p:117
    Contact details of provider: Postal: P.O. Box 14155-6445, Postal Code 14114, Tehran
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    Web page: http://economics.ut.ac.ir/

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    1. Hamburger, Michael J. & Zwick, Burton, 1981. "Deficits, money and inflation," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 141-150.
    2. O. Cevdet Akcay & C. Emre Alper & Suleyman Ozmucur, 1996. "Budget Deficit, Money Supply and Inflation: Evidence from Low and High Frequency Data for Turkey," Working Papers 1996/12, Bogazici University, Department of Economics.
    3. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    4. Edwards, Sebastian & Tabellini, Guido, 1991. "Explaining fiscal policies and inflation in developing countries," Journal of International Money and Finance, Elsevier, vol. 10(1, Supple), pages S16-S48, March.
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