Does the type of government expenditure affect the cyclicality of fiscal policy? (Case study: Iran)

Document Type : Research Paper

Authors

Department of Economics, Faculty of Economics and Management, Shiraz Branch, Islamic Azad University, Shiraz, Iran

Abstract

One of the main objectives of fiscal policy is to stabilize business cycles and macroeconomic stability. Procyclical fiscal policy intensifies business cycle fluctuations and increases the economy's vulnerability to external shocks. Determining the cyclical properties of various types of government expenditures helps the government to adopt an appropriate fiscal policy in times of economic crisis in a way that ensures economic stability. The purpose of this paper is to evaluate the cyclical features of fiscal policy and its determinants with respect to the various types of government expenditures in Iran. Using Iran’s time series data from 1980 to 2019 and a regression-based method with a two-stage autoregressive distributed lags model, this study shows that fiscal policy in Iran is procyclical and therefore does not pursue stabilization. In addition, among the various types of government expenditures, government investment in machinery and total government investment has the highest level of procyclicality. Adding control variables intensifies the procyclicality of government investment in construction and government investment in machinery and total government expenditures, and reduces the procyclicality of government consumption and total government investment.

Keywords

[1] A. Abbott and P. Jones, Intergovernmental transfers and Pprocyclical public spending, Econ. Lett. 115 (2012), 447–451.
[2] A. Abiad and J.D. Ostry, Primary surpluses and sustainable debt levels in emerging market countries, IMF Policy Discussion Paper, PDP/05/6, 2005.
[3] P. Aghion and I. Marinescu, Cyclical budgetary pPolicy and economic growth: What do we learn from OECD panel data?, NBER Macroecon. Ann. 22 (2007), no. 1, 251–278.
[4] A. Alesina, F. Campante and G. Tabellini, Why is fiscal policy often procyclical?, J. Eur. Econ. Assoc. 6 (2008), no. 5, 1006–1036.
[5] M. Ardanaz, P.M. Pinto and S.M. Pinto, Fiscal policy in good times and bad times: Distributive motivations and pro-cyclical spending, Federal Reserve Bank of Richmond, https://www.semanticscholar.org/., 2019.
[6] J. Asiama, N. Akosah and E. Owusu-Afriyie, Assessment of fiscal sustainability in Ghana, Bank of Gana Working Paper, WP/BOG-2014/09, 2014.
[7] A. Auerbach, Long-term fFiscal Ssustainability in advanced Eeconomies, Asia Pacific Policy Stud. 3 (2016), no. 2, 142–154.
[8] H. Badinger, Cyclical Expenditure Policy, Output Volatility and Economic Growth, Applied Economics 44 (2012), no. 7, 835-851.
[9] Central Bank of the Islamic Republic of Iran, Time Series Data Bank, https://www.cbi.ir/page/4275.aspx
[10] J. Clemens and S. Miran, Fiscal policy multipliers on subnational government Sspending, Amer. Econ. J.: Econ. policy 4 (2012), no. 2, 46–68.
[11] W.M. Corden, Ambulance economics: The pros and cons of fiscal stimuli, Open Econ. Rev. 22 (2011), 235–245.
[12] O. Diallo, Tortuous road toward countercyclical fFiscal policy: Lessons from democratized Sub-Saharan Africa, J. Policy Model. 31 (2009), no. 1, 36–50.
[13] R. Escario, M. Gadea and M. Sabate, Multicointegration, seigniorage and fiscal sustainability, J. Policy Model. 34 (2012), 270–283.
[14] K. Fasoye, Cyclicality of fiscal policy in Nigeria (1999-2017), Afr. J. Econ. Rev. 7 (2019), no. 2, 183–192.
[15] J.A. Frankel, C.A. Vegh and G. Vuletin, On graduation from fiscal procyclicality, J. Dev. Econ. 100 (2013), no. 1, 32–47.
[16] M. Gavin and R. Perotti, Fiscal policy in Latin American, NEBR Macroecon., 12 (1997), 11–61.
[17] M. Ghasemi and P. Mohajeri Investigating the cyclical behavior of fiscal policy in Iran, J. Econ. 15 (2015), no. 56, 75–104.
[18] B. Gootjes and J.D. Haan, Procyclicality of fiscal policy in European Union countries, J. Int. Money Finance 120 (2022), 102276.
[19] H. Halland and M. Bleaney, Explaining the pro-cyclicality of fiscal policy in developing countries, Credit Res. Paper (2009), no. 11/09.
[20] F. Huart, Has fiscal discretion during Ggood times and bad times changed in the Euro area countries?, Econ. Bull. 31 (2011), no. 1, 404–415.
[21] E. Ilzetzki, Rent seeking distortions and Ffiscal procyclicality, J. Dev. Econ. 96 (2011), no. 1, 30–16.
[22] E. Ilzetski and C.A. V´egh, Procyclical fiscal policy in developing countries: Truth or fiction?, NBER Working Paper Series (2008), no. 14191.
[23] G. Kaminsky, C. Reinhart and C. V´egh, When it rains, it pours: Procyclical capital flows and macroeconomic policies, NBER Working Paper (2004), no. 10780.
[24] M. Khalid, W.W.S. Malik and A. Sattar, The fiscal reaction function and the transmission mechanism for Pakistan, Pakistan Dev. Rev. 46 (2007), no. 4, 435–447.
[25] P.R. Lane, On the cyclicality of Irish fiscal policy, Econ. Soc. Rev. 29 (1998), 1–17.
[26] P.R. Lane, The cyclical behaviour of fiscal policy: evidence from the OECD, J. Public Econ. 87 (2003), 2661–2675.
[27] V. Lled´o, I. Yackovlev and L. Gadenne, Cyclical patterns of government expenditures in Sub-Saharan Africa: Facts and factors, IMF Working Paper (2009), no. 09/274.
[28] M. Mackiewicz, Determinants of cyclicality of fiscal surpluses in the OECD cCountries, MPRA Paper, no. 16034, University Library of Munich, 2008.
[29] P. Manasse, Procyclical fiscal policy: Shocks, Rrules, and institutions - A view from MARS, IMF Working Paper (2006), no. 06/27.
[30] J. Mawejje and N. M. Odhiambo, The determinants and cyclicality of fiscal policy: Empirical evidence from East Africa, Int. Econ. 169 (2022), 55–70.
[31] C. Mutuku, Assessing fiscal policy cyclicality and sustainability: A fiscal reaction function for Kenya, J. Econ. Lib. 2 (2015), no. 3, 173–191.
[32] M.H. Pesaran and Y. Shin, An autoregressive distributed-lag modelling approach to cointegration analysis, Econ. Soc. Monographs 31 (1998), 371–413.
[33] M.H. Pesaran, Y. Shin and R.J. Smith, Bounds testing approaches to the analysis of level relationships, J. Appl. Economet. 16 (2001), no. 3, 289–326.
[34] K.J. Preacher, A primer on interaction effects in multiple linear regression, Retrieved 15 October, 2003, 2011from http://www.quantpsy.org/interact/interactions.htm.
[35] E. Talvi and C. A. Vegh, Tax base variability and procyclical fiscal policy in developing countries, J. Dev. Econ. 78 (2005), no. 1, 156–190.
[36] J. Woo, Why do more polarized countries run more procyclical fiscal policy?, Rev. Econ. Statist. 91 (2009), no. 4, 850 870.
[37] C. Wyplosz, Fiscal rules: Theoretical issues and historical experiences, NBER Working Paper (2012), no. 17884.
[38] J. Zareii, Cyclical behavior of fiscal policy and factors affecting it with an emphasis on the role of fiscal rules, Quart. J. Monetary Bank. Res. 8 (2015), no. 26, 543–569.
Volume 14, Issue 4
April 2023
Pages 139-150
  • Receive Date: 06 November 2021
  • Revise Date: 20 January 2022
  • Accept Date: 19 February 2022