The Role of Government Revenue and Expenditure Shocks in Changes in the Inflation of the Iranian Economy in Different Conditions of the Inflationary Situation (Considering the Various Components of Government Income and Expenditure)

Abstract

The present study aims to examine the impact of different types of income (oil and tax) and government expenditure (current and construction) shocks on inflation under varying inflationary conditions. To achieve this objective, quarterly data from the Iranian economy from 1369 to 1399 was utilized, and a regime switching structural vector autoregression model based on stochastic volatility was employed to analyze. In this approach, inflation was considered as a regime variable, and a threshold value of 21% was estimated for each season. Subsequently, regime switching impulse response functions were employed to explore the effects of shocks in oil and tax income, current and construction expenditures, exchange rate, liquidity, and GDP growth on inflation. The findings of the STVAR-SV model employed in this study demonstrated that the impact of shocks in government revenues (oil and tax) and expenditures (current and construction) on inflation is much stronger in the high inflation regime (inflation above 21% in each season) compared to the low inflation regime (inflation below 21% in each season). Notably, the effect of shocks in government construction expenditures and oil revenues is significant solely in the high inflation regime, while being nonsignificant in the low inflation regime. Conversely, shocks in current government expenditures and tax revenues have a positive and significant effect on inflation in both inflationary regimes.

Keywords

• current government expenditures
• capital expenditures
• markov switching
• inflationary regimes
• taxes