Comparison of the Spillover Effects of Monetary and Fiscal Policies of China and Iran on Iran’s Macroeconomic Variables

Changes in China’s monetary and fiscal policies can significantly affect Iran’s macroeconomic variables through channels such as exchange rate fluctuations, capital flows, and market expectations. On the other hand, Iran, as a developing economy dependent on oil revenues, is also influenced by its own domestic monetary and fiscal policies, which affect real variables such as exports, imports, employment, and investment. Accordingly, this study aims to examine and compare the spillover effects of monetary and fiscal policies of China and Iran on Iran’s macroeconomic variables. This research investigates the spillover effects of monetary and fiscal policies of China and Iran on Iran’s macroeconomic variables using a Time-Varying Parameter Vector Autoregression (TVP-VAR) approach, based on monthly data over the period 1999–2022. The variables used for Iran in the model include the real effective exchange rate (REXCH), employment (EMP), exports of goods and services (EXP), imports (IMP), gross fixed capital formation (GFCF), money supply growth (M2), and total government expenditure (EXPEN). For both China and Iran, money supply growth and total government expenditure are also considered as indicators of monetary and fiscal policy. The results indicate that China’s policy shocks have a limited, short-term impact on the Iranian economy. In contrast, Iran’s domestic policy shocks, particularly changes in the money supply and total government expenditure, are the main drivers of economic fluctuations in the country. Money supply growth in Iran is the most persistent and influential variable in transmitting fluctuations across economic sectors. Increases in the money supply are associated with inflationary pressures, reduced purchasing power, exchange rate instability, and weaker employment.