Monetary economy
Sosan Etemadinia; Kiumars Shahbazi; Khadijeh Hassanzadeh
Abstract
Financial instability causes uncertainty and a lack of transparency in the market and decision-making processes, ultimately leading to reduced investment and economic growth. Additionally, economic shocks alter investors’ expectations. This study relied on the seasonal data from 1991/3 to 2021/6 ...
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Financial instability causes uncertainty and a lack of transparency in the market and decision-making processes, ultimately leading to reduced investment and economic growth. Additionally, economic shocks alter investors’ expectations. This study relied on the seasonal data from 1991/3 to 2021/6 in order to identify financial shocks and their impact on macroeconomic variables such GDP, the debt-to-GDP ratio, and financial instability. The Threshold Vector Autoregression (TVAR) model was used to analyze the data. The findings showed that fiscal policies (debt-to-GDP ratio) reduce GDP. Second, positive shocks from financial instability lead to a decrease in GDP and the debt-to-GDP ratio. In the first regime, positive fiscal policy shocks (increase in the debt-to-GDP ratio) leads to an increase in financial instability, while in the second regime, positive fiscal policy shocks can reduce financial instability.IntroductionFinancial instability leads to uncertainty and a lack of transparency in the market and decision-making processes, ultimately resulting in reduced investment and economic growth. Economic shocks also alter investors’ expectations, affecting the value of current assets and influencing both the financial and real sectors. During periods of financial instability, government debt management needs to adopt specific strategies. The simultaneous occurrence of a financial crisis and an economic recession signals a major downturn, and historical evidence shows a relative correlation between economic recessions and heightened financial market instability. In times of increased financial instability, the share of overdue loans rises, and negative market sentiments reduce the value of other financial assets. Disruptions in financial markets or a high level of overdue loans on banks’ balance sheets can lead to an economic recession by restricting credit flows to other sectors. Countercyclical fiscal policy can mitigate the reduction in the private sector demand by increasing government spending or cutting taxes, thereby compensating for the diminished credit flows from a weakened financial sector. Furthermore, government spending dependent on financial aid in weak sectors can improve economic sentiments and expectations, helping to strengthen the economy. However, financial development that facilitates easy access to existing financial resources can increase financial instability due to concerns about government debt sustainability. In this respect, the present study aimed to examine the nonlinear relationship (the effects of positive and negative shocks) between financial market instability, fiscal policy, and the production sector in Iran.Materials and MethodsThis study relied on using the seasonal data from 1991/3 to 2021/6 in order to examine the relationship between financial market instability, fiscal policy, and production in Iran. The Threshold Vector Autoregression (TVAR) model was used for the analysis. The primary version of the model used in this study is as follows:yt=[LGDPt,FSIt, DFt, LCPIt, LM2t]Due to its nonlinearity, the TVAR model can capture the varying magnitudes and directions of shocks that can affect how variables impact each other. Unlike the linear VAR model, where the impact of a negative shock is merely the opposite of a positive shock, the TVAR model allows for asymmetrical effects, where shocks of different sizes and directions can yield different outcomes. Results and DiscussionAccording to the findings, fiscal policies (debt-to-GDP ratio) decrease GDP, and positive shocks from financial instability lead to a decrease in both GDP and the debt-to-GDP ratio. Moreover, a positive shock in fiscal policy (increase in the debt-to-GDP ratio) increases financial instability in the first regime, but reduces it in the second regime. Also, negative shocks have opposite effects in both regimes. This suggests that in strong regimes with high liquidity, the debt-to-GDP ratio is lower, thus reducing the risk of instability. However, when fiscal policies such as tax cuts and increased government spending are pursued in a strong economy, financial instability may increase partly due to higher tax revenue and increased government spending; however, these policies are less profitable. In weak, low-cash regimes with unsustainable and income-dependent economies, the debt-to-GDP ratio is higher, leading to greater instability. Nonetheless, appropriate fiscal policies can prevent financial instability even in weaker regimes, promoting significant economic growth without increasing the risk of financial instability. The estimated TVAR model indicates nonlinear effects in the response of variables to exogenous shocks. Based on threshold effect tests in the first model (production response), the optimal threshold value (liquidity difference) is 0.4794. Periods where the threshold variable is less than 0.4794 are categorized as low regime, while other periods are categorized as high regime. In both regimes, a positive financial instability shock reduces fiscal policy (debt-to-GDP ratio). In the first regime, a positive fiscal policy shock (increase in the debt-to-GDP ratio) increases financial instability, while in the second regime, it reduces financial instability.ConclusionThe present study employed the TVAR model and the seasonal data from 1991 to 2021 in order to examine the relationship between financial market instability, fiscal policy, and production in Iran. Unlike the linear VAR model where effects of negative and positive shocks are symmetrical, the nonlinearity of the TVAR model shows that the size and direction of shocks impact how variables interact, thus leading to different outcomes. The findings revealed a nonlinear response of variables to incoming shocks. The TVAR model results, based on threshold effect tests in the first model (production response), identified an optimal threshold value of 0.04794. Periods below this threshold are categorized as low regime. The instantaneous response functions indicated that positive shocks in financial instability negatively impact GDP in both regimes. Generally, financial instability causes market uncertainty and a lack of transparency, leading to reduced investment and decreased economic growth. Additionally, positive shocks of fiscal policies (e.g., the debt-to-GDP ratio) decrease GDP in both regimes. The instantaneous reaction functions showed that a positive shock in financial instability reduces fiscal policy in both regimes. According to the results, a positive shock in fiscal policy increases financial instability in the first regime, while it decreases financial instability in the second regime.
Economic Development
Hossein Rajabpour; Farshad Momeni; Ali Nasiri Aghdam
Abstract
This article considers the effect of fiscal policy on inclusive development. Inclusive development is one of the concepts that has been introduced in the development economics literature in the last decade and especially with emphasis on the social and political aspects of development, the distribution ...
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This article considers the effect of fiscal policy on inclusive development. Inclusive development is one of the concepts that has been introduced in the development economics literature in the last decade and especially with emphasis on the social and political aspects of development, the distribution of development achievements among different sections of society is in focus. Since fiscal policies are one of the main instruments of the government to eliminate deprivation and imbalances, it is important to understand the effectiveness of these policies in this regard. In this study, the components of fiscal policy include the combination of expenditures and revenues and its effect on inclusive development in the period 1981-2018 in the form of two models of structural vector auto-regression has been studied. Findings show that most components of government fiscal policy except economic expenditures do not have a significant effect on the index of inclusive development and these economic expenditures have a negative impact on inclusive development. The results show that the government's fiscal policies have failed to achieve or accelerate inclusive development, and despite its legal mission, the government has not been successful in comprehensive expanding welfare and extending it to all social groups. Historical analysis also shows that since the beginning of the 2010s and with the intensification of sanctions and currency fluctuations, the relationship between fiscal policy and the index of inclusive development has been weakened. It seems that the reform of the budgeting process and the simultaneous attention to the two constraints of equality and sustainability in growth and development targeting for fiscal policy on inclusive development is essential.
Siab Mamipour; Soghra Jafari; Ziba Sasanian Asl
Abstract
The main purpose of this paper is to investigate the effects of monetary and fiscal policies on the business cycles in the Iranian economy during the period 2004-2016. Markov Switching model has been used with time varying transitional probabilities for the recognition of the business cycle and identifying ...
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The main purpose of this paper is to investigate the effects of monetary and fiscal policies on the business cycles in the Iranian economy during the period 2004-2016. Markov Switching model has been used with time varying transitional probabilities for the recognition of the business cycle and identifying the influencing factors on the probability of staying in a period of recession and boom or the transition from one situation to another. The results of the MSIH(2)-AR(2)[1] model show that both expansionary monetary and fiscal policies increase expansion period, but expansionary monetary policy is more effective in expansionary fiscal policy. During the recession regime, fiscal policy has a greater impact than a monetary policy in the transition from the recession regime. Also, findings show that business cycles in Iranian economy have comovements with changes of oil revenues, but the effect of changes in oil revenues has a different effect on the staying or transition of business cycles. Thus, the increase of oil revenues reduces the probability of staying economic boom regime, but it will increase the transition probability of recession to boom regime. In fact, these results indicate that oil revenues are not managed well during the boom period but there is the relatively good management in the recession regime. [1]- Markov Switching Intercept and Heteroskedasticity terms (2 regimes)-AutoRegressive (2 Lags)
Javid Bahrami; Meysam Rafei
Volume 19, Issue 58 , April 2014, , Pages 1-37
Abstract
Using a New Keynesian dynamic stochastic general equilibrium of Iran with price rigidity and imperfect markets, this paper shows how different stochastic shocks affect main macroeconomic variables in presence of variety of reaction functions. In this way, we compare the response of those variables to ...
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Using a New Keynesian dynamic stochastic general equilibrium of Iran with price rigidity and imperfect markets, this paper shows how different stochastic shocks affect main macroeconomic variables in presence of variety of reaction functions. In this way, we compare the response of those variables to the shocks in baseline scenario (which the government does not perform any reaction) with an alternative; when government reacts counter-cyclically through back ward looking fiscal rules. Our findings was in favor of active counter-cyclical fiscal policy, by showing that the deviations from target values decrease when government reacts actively.
Fariba Moslehi
Volume 8, Issue 27 , July 2006, , Pages 133-151
Abstract
This paper examines the usefulness of monetary and fiscal policy on real and nominal variables in Iran’s economy. Our analysis is based on annual data from 1338 to 1383, employing SUR method. The results indicate that none of the two policies, monetary and fiscal, have impact on real variables, ...
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This paper examines the usefulness of monetary and fiscal policy on real and nominal variables in Iran’s economy. Our analysis is based on annual data from 1338 to 1383, employing SUR method. The results indicate that none of the two policies, monetary and fiscal, have impact on real variables, but the role of thoese pPolicies on prices are remarkable. Accordingly, it is concluded that real variables in Iran’s economy cannot be affected by monetary and fiscal policies, but disinflationary effects of theise policies are important.
