The Effect of Government Spending Shock on Gross Domestic Product in Iran
Subject Areas : Computational economics
1 -
Keywords: Fiscal policy, general equilibrium, production,
Abstract :
Extended Abstract
Purpose
Public spending and the role of the government were limited due to the laissez-faire approach until the Great Depression of the 1930s, when Keynes introduced the concept of government intervention in the economy through the use of monetary and fiscal policies. In this regard, fiscal policy is one of the main tools for achieving macroeconomic goals, which includes the use of government spending and taxes to influence the aggregate demand for goods and services. Accordingly, the aim of this study is to examine the effect of a government spending shock on GDP in Iran in the form of a stochastic dynamic general equilibrium model. The calibration results show that a positive government spending shock of one percent increases non-oil production, inflation rate, employment, and GDP by about 0.02, 0.001, 0.06, and 0.01 percent, respectively, and decreases investment and consumption by about 0.69 and 0.19 percent, respectively, in the current period. Meanwhile, the occurrence of oil revenue and technology shocks increase GDP by about 0.2 and 0.96 percent, respectively. Accordingly, the government spending shock has the least impact on GDP, and the technology shock has the greatest impact overall.
Purpose
Achieving macroeconomic goals, including full employment, stability of price levels, and sustainable economic growth is the policy priority of any economy, and fiscal policy is one of the main tools for achieving macroeconomic goals. Fiscal policy is the use of government spending and taxation to influence the economy. Government spending is an important demand management tool and, if properly managed, has the potential to propel the economy towards long-term sustainable development. Government spending has three main components: capital spending, public consumption spending, and transfer payments. There are two types of fiscal policy: expansionary fiscal policy and contractionary fiscal policy. Expansionary fiscal policy involves increasing government spending or reducing taxes, while contractionary fiscal policy involves reducing government spending or increasing taxes. Expansionary fiscal policy can be used during recessions and contractionary fiscal policy can be used during booms. Thus, the aim of this research is to investigate the effects of government spending shock on GDP in Iran, in the form of a dynamic stochastic general equilibrium model.
Methodology
Dynamic stochastic general equilibrium (DSGE) models usually assume optimization agents that maximize their objective function subject to relevant constraints. Almost all models, including DSGE models, have parameters whose values need to be determined. The two main methods for determining these values in DSGE models are estimation and calibration. In this research, parameters are determined based on the calibration method. In addition, the annual data obtained from the Ministry of Economic Affairs and Finance for the period 1380-1402 (at the constant price of 1390) was used.
Finding
To evaluate the model, the moments obtained from the endogenous variables of the model are compared with the moments obtained from the real data. The comparison shows that the model has been able to simulate the behavior and fluctuations of the variables well and indicates the ability of the model to predict the fluctuations of the variables.
The Impulse Response Function is a tool for describing the dynamic effects of shocks on macroeconomic time series. A positive shock in government spending by one percent increases non-oil output, inflation rate, interest rate, employment, tax revenue, and GDP by about 0.02, 0.001, 0.04, 0.06, 2.2, and 0.01 percent, respectively, and decreases investment, capital stock, and consumption by about 0.69, 0.02, and 0.19 percent, respectively, in the current period. Meanwhile, a positive shock in oil revenues by one percent increases inflation, GDP, consumption, and investment by about 0.72, 0.2, 0.18, and 0.78 percent, respectively, and decreases employment and non-oil production by about 0.06 and 0.018 percent in the current period. Also, a technology shock increases inflation, GDP, consumption, employment, investment, and non-oil production by about 0.02, 0.96, 0.33, 0.27, 5.5, and 1.2 percent in the current period.
Conclusion
Public spending and the role of the government were limited due to the laissez-faire approach until the Great Depression of the 1930s, when Keynes introduced the concept of government intervention in the economy through the use of monetary and fiscal policies. Therefore, this research examines the effect of government spending shock on GDP in Iran using the DSGE approach. The results show that a positive shock to government spending increases non-oil production, inflation rate, interest rate, employment, tax revenue, and GDP, and decreases investment, capital stock, and consumption in the current period. Considering the effects of the shocks, the government spending shock has the least impact on GDP, and overall, the technology shock has the best impact.
-Abdollah Milani, M., Bahrami, J., Tavakolian, H. and Akbarpur, N. (2018). The Impact of Tax Policy on the Underground Economy: DSGE Model. Economic Research, 23(76), 1-51. Retrieved from https://doi.org/10.22054/ijer.2018.9511/(In Persian)
- Ahmadi, S., Khezri, M., Zandi, F. and Safavi, B. (2024). investigating the effect of oil revenues on tax revenues realization under conditions of tax rent-seeking: DSGE Approach. Economic Policy, 16(32), 117-144. Retrieved from https://doi.org/10.22034/epj.2024.21083.2552/(In Persian)
- Akpan, U. F. and Atan, J. A. (2015). Macroeconomic Effects of Fiscal Policy Shock in Nigeria: A SVAR Approach. International Journal of Business and Economics Research, 4(3), 109-120. Retrieved from https://doi.org/ 10.11648/j.ijber.20150403.14/
- Amirali, M., bakhshi dastjerdi, R. and vaez barzani, M. (2023). The Real Effects of the Bank’s Function as a Creator of Liquidity Through Lending and Factitious Rollover of Non-Performing Loans Channels (DSGE Approach). Economic Research, 57(4), 583-628.Retrieved from https://doi.org/ 10.22059/jte.2023.92422/(In Persian)
- Amire, C. M. and Amire, P. O. (2020). Government Expenditure in Nigeria: An Evaluation. AE-FUNAI. Journal of Accounting Business and Finance, 6(1),178-186.
- Atems, B. (2019). The effects of government spending shocks: Evidence from US states. Regional Science and Urban Economics, 74, 65-80. Retrieved from https://doi.org/10.1016/j.regsciurbeco.2018.11.008/
- Babalola, A. I. (2015). Fiscal Policy and Economic Development in Nigeria. Journal of Economics and Sustainable Development, 6(7), 150-159. Retrieved from https://www.iiste.org/Journals/index.php/JEDS/article/view/21476/
- Beetsma, R. and Giuliodori, M. (2011). The effects of government purchases shocks: review and estimates for the EU. The Economic Journal, 121(550), 4-32. Retrieved fromhttps://doi.org/10.1111/j.1468-0297.2010.02413.x/
-Beltran, D. O. and Draper, D. (2008). Estimating the parameters of a small open economy DSGE model: Identifiability and inferential validity. FRB International Finance Discussion Paper, 955. Retrieved from http://dx.doi.org/10.2139/ssrn.1311887/
- Cebi, C. (2017). The government spending multiplier in Turkey. Emerging Markets Finance and Trade, 53(5), 1184-1198. Retrieved from
https://doi.org/10.1080/1540496X.2016.1174685/
-Chandana, A., Adamu, J. and Musa, A. (2020). Impact of government expenditure on economic growth in Nigeria, 1970 - 2019. CBN Journal of Applied Statistics (JAS), 11(2), 139-174. Retrieved from https://dc.cbn.gov.ng/jas/vol11/iss2/6/
- Choi, Y., and Kim, S. H. (2021). Understanding the effects of government spending in a time-inconsistent model. Economic Modelling, 98, 266-279. Retrieved fromhttps://doi.org/10.1016/j.econmod.2020.11.018/
-Dawkins, C., Srinivasan, T. N. and Whalley, J. (2001). Calibration. In Handbook of econometrics, 5, 3653-3703. Elsevier. Retrieved from https://ideas.repec.org/h/eee/ecochp/5-58.html/
- Duong, T., Vu, G., Nguyen, T. and Pham-Hi, D. (2016). Impacts of government spending shock on Vietnamese macroeconomic aggregate variables: DSGE and SVAR models. Communications in Mathematics and Applications, 7(4), 343-359. Retrieved from https://doi.org/ 10.26713/cma.v7i4.490/
- Eslamloueyan, k. and Tavakoli, H. (2020). The Effects of Government Expenditure Shocks on Input Efficiency and Consumer Preferences in Iran. Quantitative Economics ,17(3), 1-19. Retrieved from https://doi.org/10.22055/jqe.2020.24789.1814/(In Persian)
- Fathabadi, M., Haji, M. M. M. S., Mahmoudzadeh, M., and Qavidel, S. (2024). Uncertainty of government expenditure policy and economic activity in Iran. Financial Economics, 18(66), 483-504. Retrieved from https://doi.org/ 10.30495/fed.2024.709383/(In Persian)
- Hadian, M. and Dargahi, H. (2021). Macroeconomic effects of current and development expenditures of the government in Iran: DSGE approach. Quarterly Journal of Applied Theories of Economics, 8(1), 241-272. Retrieved from https://doi.org/ 10.22034/ecoj.2021.42007.2744/(In Persian)
- Hadian, E., Afshoon, H. A., Samadi, A., & Sadraei javaheri, A. (2020). Investigate the Effects of Public Expenditure on Macroeconomic Variables under a Balanced Budget Rule in Iran: a DSGE Approach. Journal of Economic Research and Policies, 27 (92) , 89-132. Retrieved from http://qjerp.ir/article-1-2531-en.html/(In Persian)
- Haghighat, J. and Moharam Joudi, N. (2017). Investigating The Effects Of Governmental Expenditure Shock on Gross Domestic Product Growth In Iran: Ardl Approach. Economic Modelling, 10(4), 141-166. (In Persian)
- HosseinZade, H. (2017). The Effects of Government Expenditure Shocks on Gross Domestic Product (GDP) in Iran. Quarterly Journal of The Macro and Strategic Policies, 5(17), 77-95. (In Persian)
- Jabbari, A. and Akbari, N. (2018). The Dynamic Effects of Fiscal Policy Shocks on the Variables of Production, Consumption and Private Sector Investment in IRAN. Macroeconomics Research Letter, 13(26), 79-100. Retrieved from https://doi.org/ 10.22080/iejm.2019.14444.1608/(In Persian)
- Keshtkaran, N., Behboudi, D. and Panahi, H. (2021). The Asymmetric Effects of Monetary Policy Shocks on the Residential Market of Iran:A DSGE Approach. Applied Theories of Economics, 7(4), 195-218. Retrieved from https://doi.org/ 10.22034/ecoj.2021.39757.2659/(In Persian)
- Khalilzadeh, J., Heidari, H. and Bashiri, S. (2020). The Effect of Government Expenditures and Banking Credits Volume Considering Monetary Policies on Economic Growth: DSGE Model (Case Study of Iran). Economic Growth and Development Research, 10(39), 75-92. Retrieved from https://doi.org/10.30473/egdr.2019.47760.5306/(In Persian)
- Tanzi, V. and Schuknecht, L. (2000). Public Spending in the 20th Century. Cambridge University Press. Retrieved from https://doi.org/10.1017/CBO9780511625800/
- Maddah, M. and Samiei, N. (2019). The Effect of Financial and Monetary Shocks on the Iranian Taxation System along with Determining Optimal Tax Rates of Consumption, Salary and Wages (General Equilibrium Approach using Genetic Algorithm). Tax Research, 25 (36),177-210. (In Persian)
- Mahmoudinia, D. And Jafari, S. (2024). The Welfare Cost of Inflation in a Steady State: An Application of Various Utility Functions in the Sidrauski Model. Fiscal and Economic Policies, 11(44), 7-51. Retrieved from http://qjfep.ir/article-1-1538-en.html/(In Persian)
- Mousavi, B., Farazmand, H., Arman, S. A. and Mansori, S.A. (2022). Tax Reform and the Dynamics of Macroeconomic Variables in Iran: A Dynamic Stochastic General Equilibrium (DSGE). Tax Research, 30 (54) ,7-28. Retrieved from http:// doi.org/10.52547/taxjournal.30.54.7/(In Persian)
- Muritala, T. and Taiwo, A. (2011). Government expenditure and economic development: Empirical evidence from Nigeria. European Journal of Business and Management, 3(9), 18-28.
- Nnamocha, P. N. and Anyanwu, A. C. P. (2022). Government Expenditure and Performance of Selected Macroeconomic Variables in Nigeria (1981–2018). International Journal of Research and Scientific Innovation, 9(1), 138-150.
- Osinowo, O.H. (2015). Effect of Fiscal Policy on Sectoral Output Growth in Nigeria. Advances in Economics and Business, 3(6), 195-203. Retrieved from https://doi.org/ 10.13189/aeb.2015.030601/
- Panahi, H. , Behboudi, D. , Asgharpour, H. and Keshtkaran, N. (2018). An Analysis of the Effects of Monetary Policy Shocks on the Housing Sector: (A DSGE Model). Urban Economics, 3(2), 1-18. Retrieved from https://doi.org/ 10.22108/ue.2019.111991.1070/(In Persian)
- Radhi, H. (2018). The relationship between government expenditure and GDP in non-oil Iraqi economy. Journal of the Arab American University, 4(2), 46-71.
- Roberts, T., Cabral, F. J. and Coly, S. M. (2020). Economic Impact of Public Expenditure in The Gambia. Global Journal of Management and Business Research, 20(6). Retrieved from https://doi.org/ 10.34257/GJMBRBVOL20IS6PG39/
- Radu, Ş. C. (2023). The Effects of Government Expenditure on the Output: A Real Business Cycle Analysis for the Romanian Economy. Studia Universitatis Babes Bolyai-Oeconomica, 68(2), 55-72. Retrieved from https://doi.org/10.2478/subboec-2023-0009/
- Saadatmehr, M. and Ghafari, H. (2019). The Comparative Study of the Impacts of Monetary and Fiscal Policies on the Economy of Iran: DSGE Model Approach. The Journal of Economic Studies and Policies, 6(1), 51-74. Retrieved from https://economic.mofidu.ac.ir/article_37170.html/(In Persian)
- Slanicay, M. (2014). Some Notes on Historical, Theoretical, and Empirical Background of DSGE Models. Review of Economic Perspectives, 14(2), 145-164. Retrieved from https://doi.org/ 10.2478/revecp-2014-0008/
- Sujudi Kurabaslu, A., Daei Karimzadeh, S. And Sharifi Renani, H. (2021). Impulse Response Analysis of the Effects of Shocks to Government Consumption Expenditures on Macroeconomic Variables (Case Study: Oil and Non-Oil Developing Countries. Economic Research and Policies, 29(97), 283-311. Retrieved from http://doi.org/ 10.52547/qjerp.29.97.283/(In Persian)
- Tayefeh jabbari, R., Mohammadi, T. and Bahrami, J. (2022). Applications of fiscal policy with the presence of households with finger consumption using dynamic stochastic general equilibrium model approach. Applied Theories of Economics, 9(1), 27-56. Retrieved from https://doi.org/ 10.22034/ecoj.2021.42755.2767/(In Persian)
- Tcherneva, R. P. (2011). Fiscal Policy Effectiveness: Lessons from the Great Recession. Working Paper No. 649. Retrieved from http://dx.doi.org/10.2139/ssrn.1760135/
- Tenhofen, J., Wolff, G. B. and Heppke-Falk, K. H. (2010). The macroeconomic effects of exogenous fiscal policy shocks in Germany: a disaggregated SVAR analysis. Jahrbucher fur Nationalokonomie und Statistik, 230(3), 328-355. Retrieved from https://doi.org/10.1515/jbnst-2010-0305/
- Yang, W., Fidrmuc, J. and Ghosh, S. (2012). Macroeconomic effects of government spending shocks: new evidence using natural disaster relief in Korea. CEDI Discussion Paper Series 12-05, Centre for Economic Development and Institutions (CEDI), Brunel University. Retrieved from https://dx.doi.org/10.2139/ssrn.2155603/
- Zyphur, M. J. and Oswald, F. L. (2015). Bayesian estimation and inference: A user’s guide. Journal of Management, 41(2), 390-420. Retrieved from
https://doi.org/10.1177/0149206313501200/