Abstract: (10 Views)
This study aims to investigate the asymmetric conditional correlation between government budget imbalances and money supply growth in the Iranian economy over the period 1989 to 2024. The budget imbalance is examined at two levels: the general budget (aggregate) and a disaggregated level (operational and capital imbalances). To analyze short-run and long-run relationships, the nonlinear autoregressive distributed lag (NARDL) approach is employed. The bounds test confirms the existence of cointegration, and the error correction coefficient of the first model (-0.49) indicates an appropriate speed of adjustment.
The findings indicate that the co-movement of the general government budget imbalance with money supply growth is positive and significant, and its response to positive and negative shocks is asymmetric, such that the co-movement coefficient of positive budget imbalance shocks (1.02 in the long run) is estimated to be significantly larger than that of negative shocks (-0.70) (Wald test with a probability level of 0.000). The informal exchange rate and the rial value of oil revenues also exhibit a positive and asymmetric co-movement with liquidity. According to the disaggregated model, the co-movement of the operational imbalance with liquidity (1.07) is stronger and more persistent than that of the capital imbalance (0.69) (cross-variable Wald test with a probability level of 0.046). Furthermore, the Toda-Yamamoto causality test confirms the existence of unidirectional predictability (Granger causality) from the budget imbalance (particularly the operational imbalance) to money supply growth.
Liquidity dynamics in Iran result from the simultaneous interaction of fiscal, external, and real factors, and the observed pattern is consistent with the fiscal dominance framework. However, it is emphasized that the findings of this study are interpreted as conditional co-movements, and inference of structural causality is not possible from them. Assuming the validity of the findings, the conjecture gains strength that any economic stabilization program would inevitably require reforming the structure of current government expenditures. Testing this hypothesis requires future structural causal research.
The findings indicate that the co-movement of the general government budget imbalance with money supply growth is positive and significant, and its response to positive and negative shocks is asymmetric, such that the co-movement coefficient of positive budget imbalance shocks (1.02 in the long run) is estimated to be significantly larger than that of negative shocks (-0.70) (Wald test with a probability level of 0.000). The informal exchange rate and the rial value of oil revenues also exhibit a positive and asymmetric co-movement with liquidity. According to the disaggregated model, the co-movement of the operational imbalance with liquidity (1.07) is stronger and more persistent than that of the capital imbalance (0.69) (cross-variable Wald test with a probability level of 0.046). Furthermore, the Toda-Yamamoto causality test confirms the existence of unidirectional predictability (Granger causality) from the budget imbalance (particularly the operational imbalance) to money supply growth.
Liquidity dynamics in Iran result from the simultaneous interaction of fiscal, external, and real factors, and the observed pattern is consistent with the fiscal dominance framework. However, it is emphasized that the findings of this study are interpreted as conditional co-movements, and inference of structural causality is not possible from them. Assuming the validity of the findings, the conjecture gains strength that any economic stabilization program would inevitably require reforming the structure of current government expenditures. Testing this hypothesis requires future structural causal research.
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