International Journal of Nonlinear Analysis and Applications

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

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International Journal of Nonlinear Analysis and Applications
Volume 14, Issue 4
April 2023
Pages 139-150
  • Receive Date: 06 November 2021
  • Revise Date: 20 January 2022
  • Accept Date: 19 February 2022