Political economy
Hossein Tavakolian; Reza Taleblou; Shaghayegh Abbasali
Abstract
Despite efforts to improve the governmental budget system in Iran’s current economic situation, no significant progress has been made. The relationship between the key stakeholders—namely the government, parliament, regulatory bodies, and the general public as the ultimate beneficiaries of ...
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Despite efforts to improve the governmental budget system in Iran’s current economic situation, no significant progress has been made. The relationship between the key stakeholders—namely the government, parliament, regulatory bodies, and the general public as the ultimate beneficiaries of the budget—is not properly regulated. As a result, there is decreased transparency and accountability among various government officials. Using the Generalized Method of Moments (GMM) for the period 1993–2018, the current study aimed to examine the government off-budget operations and their impact on inflation, with a focus on fiscal dominance via the banking system. The findings suggested that increased fiscal dominance via the banking system’s debt channel had a positive effect on inflation, thereby confirming the presence of fiscal dominance. The results also highlighted a negative relationship between political stability and corruption, on the one hand, and inflation, on the other. These variables remained at low levels throughout the analyzed period, indicating a need for greater attention from the government and political factions across the country.IntroductionThe inflation rate in Iran is a major concern that contributes to rising levels of poverty, inequality, economic instability, and reduced private sector investment. This persists despite the fact that many other countries have successfully managed similar issues. Unfortunately, monetary authorities in Iran have struggled to tackle this pressing problem. The Iranian economy has long struggled with the persistent issue of high inflation, which is largely attributed to fiscal dominance over the Central Bank. Moroever, addressing the budget deficit is partially achieved through off-budget operations facilitated by the banking system. Covering the period 1993–2018, this study examined the government off-budget operations and their impact on inflation, with a focus on fiscal dominance within the banking system. It actually dealt with the Central Bank’s inability to control inflation, highlighting fiscal dominance as a key factor. Fiscal dominance arises when fiscal policymakers are not required to balance expenditures with tax revenues, thereby compelling monetary policymakers to address government budget deficits.Materials and MethodsApplying the Generalized Method of Moments (GMM) to the period 1993–2018 in Iran, the present research examined the government off-budget operations and their impact on inflation, with a focus on fiscal dominance in the banking system. The study used the data from the Central Bank, international transparency websites, and Palta to analyze the quantitative effects of government borrowing from the banking system on inflation.Results and DiscussionThe findings revealed a direct relationship between inflation and government financing through the banking system, emphasizing its analytical significance for Iran’s economy. Due to legal restrictions on borrowing directly from the Central Bank, the government turns to state-owned commercial banks for financing, resulting in a form of active fiscal dominance. This approach increases government debt to the banking system, thus affecting various economic sectors and contributing to instability and chronic inflation. The financial practice, known as off-budgeting, is marked by a lack of transparency and inefficiency in government expenditures, further exposing fiscal dominance via the banking system. Additionally, variables of political stability and corruption control play a role, highlighting the need for government attention across different sectors and political factions in the country.Table 1. GMM Estimation of the Mode )Inflation as the Dependent Variable(VariablesGMMCoef.Std. Err.z|P>|zPolitical StabilityPOLITY-0.0002726.14E-5-4.4336930.0000 Corruption controlGC-0.0003782.10E-5-18.005330.0000Exchange rate growthGER0.0706140.0232223.0407630.0034Interest rateIR(-1)-0.0459500.008164-5.6285540.0000Money base growth rateGM2(-1)0.3848440.03588510.724310.0000Government debt growth rate to private banksGGBPB(-1)0.0076620.00038220.061880.0000Government debt growth rate to state-owned banksGGBGB0.0287050.00196614.599790.0000Government debt growth rate to privatized banksGGBSPB(-2)0.0064590.00011058.499070.0000Growth rate of government oil revenuesOILP-0.1363780.018692-7.2962170.0000R2= 0.614559 J-statistic=17.89458 Prob (J-statistic)=0.985014Instrument rank=43This study explored the off-budget operations of the Iranian government and their impact on inflation, with a particular focus on fiscal dominance through the banking system. Despite efforts to reform the government budget system, the lack of proper regulation in the interactions between budget stakeholders—including the government, parliament, regulatory bodies, and the general public—has led to reduced transparency and accountability among government officials. The research showed that increasing fiscal dominance through the banking system’s debt channel had a positive effect on inflation, thereby confirming the presence of fiscal dominance. Furthermore, the study underscored the negative correlation between political stability and corruption control, on the one hand, and inflation, on the other. This highlights the need for government attention across various sectors and political factions within the country. In sum, the Iranian economy faces a persistent challenge of high inflation, primarily driven by fiscal dominance over the Central Bank. The study highlighted the government’s dependence on off-budget operations, especially through the banking system, to address budget deficits. This financial strategy is marked by a lack of transparency and efficiency, resulting in economic instability and chronic inflation. The findings emphasized the urgent need for the government to review and reform regulations, reduce structural budget deficits, and improve transparency to effectively control inflation. The low levels of political stability and corruption control throughout the analyzed period underscored the current government’s challenges, stressing the need for comprehensive reforms and action across all sectors and political factions in the country.
Mahnoush Abdollah Milani; Javid Bahrami; Hossein Tavakolian; Narges Akbarpur
Abstract
The aim of this study is to estimate the amount of underground economy as well as to determine the effect of tax policy on it in Iran. For this purpose, a Dynamic Stochastic General Equilibrium (DSGE) model is developed incorporating the underground economy. Quarterly data for 1360-1393 in Iran are used ...
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The aim of this study is to estimate the amount of underground economy as well as to determine the effect of tax policy on it in Iran. For this purpose, a Dynamic Stochastic General Equilibrium (DSGE) model is developed incorporating the underground economy. Quarterly data for 1360-1393 in Iran are used for estimation. The results show that on the average 23 percent of household consumption during the examined period is from underground goods, and about 17 percent of these goods are imported into the country through underground import or smuggling. Real average amount of smuggling and underground production in Iran during the considered period is estimated as 29023 and 141702.5 billion Rials, respectively. In addition, the results show that the average share of underground employment in total employment over the period is about 18 percent. The average tax evasion of consumption tax, import tax and wage tax is estimated about 17.8 percent of average government tax revenue during this period. Comparing the effects of four different tax shocks on underground economy also shows that the profit tax shock has the largest effect on underground economy, and after that is import tax shock. The effects of tax shocks show that the severity and duration of the impact of tax shocks on underground production is more than that of the formal economy.
