The Effect of Financial Policies on Iran's Macroeconomic Variables: Evidence from Bayesian Structural Vector Autoregression Model

Document Type : Research Article

Authors

1 Department of Economics, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamedan, Iran

2 Professor, Department of Economics, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamedan, Iran

10.22084/aes.2023.27202.3539

Abstract

According to some common views in macroeconomics, fiscal policy can be effective in macroeconomic variables and achieving macroeconomic goals. The past few decades have seen the widespread use of monetary policy tools for this purpose. Since the onset of the global financial crisis in 2008, there has been a renewed interest in using fiscal policy as a stabilizing tool. In previous studies on the macroeconomic implications of government expenditures and revenues and their effects on the overall economic structure have been studied by various empirical methods in several countries as well as in Iran. In this paper, far from previous studies, the issue has been implemented using Bayesian structural vector autoregression (B-SVAR). Because this method takes the previous information into account, the B-SVAR method is able to make more accurate estimates than other VAR models. Empirical findings show that government spending and income (income tax) has a limited effect on macroeconomic variables, including GDP, inflation, private sector consumption, income tax, and total investment, and the housing sector. Although the production response functions do not show a significant reaction to private sector shocks (which might be due to the uncertainties caused by the structure of the sample and model), the production response to these shocks is very unstable. This issue highlights the importance of monitoring the activities of the private sector without the interference of the government in such a way that destabilizes this sector. The government should be cautious in using government spending as a stabilizing policy in the short term in that the government spending shock immediately increases inflation and has no effect on production.

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Journal of Applied Economics Studies in Iran

Articles in Press, Accepted Manuscript
Available Online from 22 February 2023

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