Identification of Iran's Fiscal Policy Stance on Debt Management and Budget Deficits
Alireza Erfani
1
(
)
Azadeh Talebbeydokhti
2
(
economics department of Semnan university
)
Keywords: Active Fiscal Policy, Passive Fiscal Policy, Budget Deficit, Markov-Switching Model, Iranian Economy,
Abstract :
Analyzing the fiscal policymakers’ behavioral patterns regarding government debt and budget deficits is essential, given the central role of managing fiscal dynamics in economic stability and growth. Considering the structural challenges of budget deficits and the Iranian government's increasing reliance on borrowing from the central bank, it is necessary to analyze the extent to which the government utilizes tax tools as a sustainable revenue source for financing.
This study employs a Markov-switching model to examine the stance of Iranian fiscal policymakers from 1975 to 2022. The findings reveal three distinct policy regimes. The first regime points to an active approach by fiscal policymakers or the lack of effective tax mechanisms for financing government debt to the central bank, relying solely on tax revenues to reduce the budget deficit in 1977, 1983, 1992, and 2014. The second, despite the continuation of an active approach, shows an effort to reduce the budget deficit by increasing tax revenue during 1978-1980, 1984-1988, 1993, 2000-2001, and 2015-2020. However, robust statistical evidence does not reveal a significant response to debt and budget deficit developments. The third regime again emphasizes the dominance of an active fiscal policy approach in 1976, 1981-1982, 1989-1991, 1994-1999, 2002-2013, and 2021-2022; however, the effectiveness of taxes in controlling the budget deficit faces statistical uncertainty.
The analysis indicates weaknesses in the tax mechanisms for controlling government debt and budget deficits in the Iranian economy. These findings underscore the necessity of adopting prudent fiscal policymaking centered on fiscal discipline and strengthening tax mechanisms to ensure fiscal sustainability.
Abounoori, E., & Erfani, A. (2008). Markov-Switching Model and the Probability of Prediction of the Liquidity Crisis Within OPEC Member Countries. Economics Research, 8(30), 153-174. (In Persian).
Aghilifar, H., Piraei, K., Zare, H., & Ebrahimi , M. (2025). Fiscal Sustainability in Iran A Markov-Switching Fiscal Regime Change and Time-Varying Parameter Models Approach. The Economic Research (Sustainable Growth and Development), 25(1), 183-208.
Alexeeva, T. K. (2022). Complex Dynamic and Optimal Control of Monetary Policy in a New Keynesian Model with Government Debt. IFAC Papers OnLine, 55(40), 157-162. DOI: 10.1016/j.ifacol.2023.01.065.
Auerbach, A., Gale, W., & Harris, B. (2010). Activist fiscal policy. Journal of Economic Perspectives, 24(4), 141-164.
Billi, R. M., & Walsh, C. E. (2022). Seemingly Irresponsible but Welfare Improving Fiscal Policy at The Lower Bound . Sveriges Riksbank Working Paper Series No. 410, 1-43.
Cantore, C., & Leonardi, E. (2024). Monetary-Fiscal Interaction and the Liquidity of Government Debt. Discussion Papers 2406, Centre for Macroeconomics (CFM), 1-34.
Cooley, T. F., LeRoy, S. F., & Raymon, N. (1984). Econometric Policy Evaluation: Note. American Economic Review, 74(3), 467-470.
Davig, T., & Leeper, E. (2011). Monetary–fiscal policy interactions and fiscal stimulus. European Economic Review, 55(2), 211-227.
Davig, T., Leeper, E. M., & Chung, H. (2004). Monetary and Fiscal Policy Switching. NBER WORKING PAPER w10362, 1-46.
de Jesus, C. S., & Correia, F. M. (2016). Active Fiscal Policy and Macroeconomic Stability. Journal of Economic Studies, 43(5), 749-762.
Dewachter , H., & Toffano, P. (2012). Fiscal Activism and The Cost of Debt Financing. International Journal of Finance & Economics, 17(1), https://doi.org/10.1002/ijfe.440.
Ettmeier, S., & Kriwoluzky, A. (2020). Active, Or Passive? Revisiting The Role Of Fiscal Policy In The Great Inflation. DIW Discussion Papers No. 1872, 1-65.
Ettmeier, S., & Kriwoluzky, A. (2024). Active or Passive? Revisiting The Role of Fiscal Policy During High Inflation. European Economic Review 104874, 170, 1-16.
Falahati, A., Fatahi, S., Heidari Disgarani, A., & Shokri, N. (2018). An Investigation of Fiscal Sustainability and Fiscal Transitory Shocks in Iranian Economy. Journal of Financial Economics (financial economics and development), 11(41), 123-154. (In Persian).
Feldstein, M. (2009). Rethinking the Role of Fiscal Policy. American Economic Review, 99(2), 556-559.
Gibbs, C. G., & Xin, H. W. (2024). The Sacrifice Ratio and Active Fiscal Policy. Economics Letters, 245, 112038.
Gomes, P., & Seoane, H. D. (2024). Made in Europe: Monetary–Fiscal policy Mix with Financial Frictions. European Economic Review, 165, 104727, 1-18. https://doi.org/10.1016/j.euroecorev.2024.104727.
Hamilton, J. D. (1994). Time Series Analysis. Princeton University Press.
Harrison, R. (2021). Flexible Inflation Targeting with Active Fiscal Policy. Bank of England Working Paper No. 928, 1-50.
Hollmayr, J. (2018). Fiscal Regimes and the (Non)Stationarity of Debt. Bundesbank Discussion Papers 11, 1-24.
Karimi Potanlar, S., Jafari Samimi, A., & Montazeri Shoorekchali, J. (2017). Government Debt Sustainability in Iran: New Evidence from a Fiscal Reaction Function (FRF). Monetary & Financial Economics, 24(13), 1-29. (In Persian). doi: 10.22067/pm.v24i14.57593.
Khorramabadi, M., Rashidi, M., Seif, S., & Mohammadzadeh, M. (2024). Investigating The Effect of Government Policy Uncertainty and Interest Rate Fluctuations on The Risk of Government Bank Debts. Budget and Finance Strategic Research, 5(3), 91-113. (In Persian).
Krugman, P. (1998). It’s baaack: Japan’s Slump and the Return of the Liquidity Trap. Brookings Papers on Economic Activity, 2(1), 137-187.
Leeper, E. (1991). Equlibria under Active and Passive Monetary and Fiscal Policies. Journal of Monetary Economics, 27(1), 129-147. DOI: https://doi.org/10.1016/0304-3932(91)90007-B.
Lucas, R. (1976). Econometric Policy Evaluation: A Critique. Carnegie-Rochester Conference Series on Public Policy, 1, 19-46.
Luk, P., & Vines, D. (2015). Optimal Monetary and Fiscal Policy In an Economy with Endogenous Public Debt. CEPR Discussion Paper No. DP10580, 1-60.
Mavromatis, K. (2020). Finite Horizons and the Monetary/Fiscal Policy Mix. International Journal of Central Banking, 16, 327-378.
Samsami Mazrae Akhoond, H., & Bakhtiyari , A. (2022). Investigating The Effects of Financing The Public Sector Budget Deficit from The Banking System: Evidence From The Dynamic Stochastic General Equilibrium Model (DSGE). Journal of Economic Modeling Research, 13(49), 112-152. (In Persian).
Sargent, T., & Wallace, N. (1981). Some Unpleasant Monetarist Arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review, 5(Fall), 1-17.
Shahbazi Ghiasi, M., Rouhani, S. A., & Aziznejad, S. (2016). An Analysis of Fiscal Dominance in the Economy of Iran: Case Study of Annual Budget Laws. Quarterly Journal of Fiscal and Economic Policies, 3(12), 7-28. (In Persian).
Souri, A. (2013). Econometrics (Advanced) with Applications using Eviews 8 and Stata 12 (Vol. 2). Tehran: Farhangshenasi Publishing.
Thadden, L. (2004). Active Monetary Policy, Passive Fiscal Policy and The Value of Public Debt: Some Further Monetarist Arithmetic. Journal of Macroeconomics, 26(2), 223-251.
Tobin, J. (2001). Fiscal Policy: Its Macroeconomics in Perspective. Discussion Paper No. 1301, Cowles Foundation, New Haven.
Woodford, M. (2001). Fiscal Requirements for Price Stability. NBER Working Papers 8072, National Bureau of Economic Research, 1-78.
Woodford, M. (2011). Simple Analytics of the Government Expenditure Multiplier. American Economic Journal: Macroeconomics, 3(1), 1-35.
Yağcıbaşı , Ö., & Yıldırım, M. (2019). Estimating Taylor Rules with Markov Switching Regimes for Turkey. Journal of Economic Forecasting, Institute for Economic Forecasting, 0(3), 81-95.
Zheng, T., Wang, X., & GUO, H. (2012). Estimating Forward-looking Rules for China's Monetary Policy: A Regime-Switching Perspective. China Economic Review, 1, 47-59. DOI: 10.1016/j.chieco.2011.07.012.