Optimal Financing Methods of Government Expenditure in Iran

Subject Areas : Applied Economics

F. Ahmadisanaye ¹ , M. Kalani ² , Sh. Anosheh ³

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Received: 2015-10-05 Accepted : 2015-10-05 Published : 2015-01-21

Keywords: Government expenditure, Financing, Central Bank, Government political orientati, Auto Regressive Distributed La,

Abstract :

Taxation and seigniorage are known as the two major sources of revenue for financing the government expenditure. Simultaneous practice of these two methods provides a mechanism for government to finance it expenditure in the most efficient way. The choice between tax and seigniorage is influenced by two fundamental factors, namely the degree of central bank independence and political orientation of government. The goal of this study is to investigate how the dependency of central bank and the political alliance of three different administrations influenced the choice of financing decision. We further explore the effect of the financing method for controlling inflation. The period of our study is from 1989 to 2008. The findings of our study indicate that based on ARDL model there is a positive and meaningful relation between tax and seigniorage and parallel implementation would be beneficial.