Examining the Impact of Fiscal Policy Components on Iran’s Economic Growth: A Time-Varying Parameter Approach

Document Type : Scientific paper

Authors

1 university of tabriz

2 University of Tabriz

10.22080/mrl.2025.28343.2146

Abstract

The impact of fiscal policies on economic growth is a complex and multifaceted issue that requires a thorough analysis and deep understanding of each country's specific economic conditions and dynamics. In the case of Iran, the effectiveness of fiscal policy is significantly influenced by economic shocks, international sanctions, and shifts in fiscal strategies.  This study investigates the relationship between fiscal policies and economic growth in Iran over the period 1997–2022, utilizing a Time-Varying Parameter Vector Autoregressive (TVP-VAR) model with quarterly data.  The findings indicate an inverted U-shaped relationship between current government expenditures and economic growth. In other words, a moderate increase in current expenditures can stimulate economic growth, but beyond a certain threshold, further increases may lead to a decline in growth. Additionally, the study reveals that during periods when economic growth responds positively to current expenditures, the impact of capital (development) expenditures on growth reaches its peak. The empirical evidence suggests that the composition of current and capital government expenditures is a key determinant of the path of economic growth.  Moreover, the study shows that tax rates should be dynamically adjusted based on the state of the gross domestic product (GDP). Specifically, during periods of higher economic growth, raising tax rates may have a more positive effect on growth. In contrast, during periods of lower GDP, increasing tax rates could negatively affect economic growth. Other findings emphasize that Iran’s business cycle plays a crucial role in the effectiveness of fiscal policy, particularly regarding tax rates, on economic growth. These findings provide valuable insights for Iranian policymakers, enabling them to design more effective fiscal policies that are responsive to changing economic conditions and business cycle fluctuations.

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History

  • Receive Date: 17 January 2025
  • Revise Date: 19 July 2025
  • Accept Date: 31 August 2025

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