The impact of macroeconomic variables and tax incentives on Iran's business cycles

Subject Areas : Monetary Economics

Samane Shaki ¹ , Kambiz Peykarjoo ^{2 *} , Farhad Ghaffari ³

1 - PhD. Candidate in Economics, Faculty of Management and Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran, [e-mail]
2 - Assistant Professor in Economics, Faculty of Management and Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran (Corresponding Author), [e-mail]
3 - Associate Professor in Economics, Faculty of Management and Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran, [e-mail]

Received: 2024-07-27 Accepted : 2024-12-02 Published : 2024-12-02

Keywords: Governance, Monetary Policies, Financial Policies, Economic Welfare, Markov Switching Regime Change Model. JEL Classification: E52, G12, G19, G24, G32.,

Abstract :

Using the Markov-Switching Approach, this study analyzes the impacts of the governance index and monetary and financial policies on economic well-being in Iran's recession and boom regimes from 1996 to 2022. The findings reveal that during the boom period, each unit increase in economic well-being, regulation quality, financial stabilization, effective tax rate, and oil price reduces the production gap by 0.04, 0.02, 0.03, 0.03, and 0.14 units, respectively. Conversely, uncertainty in government current expenditures, government construction expenditures, and liquidity during the recession increases the production gap by 0.12, 0.13, and 0.14 units. Keynesian economists emphasize that regulating financial policies, such as tax and spending adjustments, fosters economic prosperity. In contrast, the classical school views taxes as a neutral financial lever. When government budget deficits result from increased current expenditures, which primarily boost aggregate demand, inflation may occur. However, when deficits arise from active fiscal policies aimed at overcoming a recession, the government’s investment spending and expansionary financial policies can stimulate production and drive the economy toward long-term growth.

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