The effects of Fiscal Policy Uncertainty on Private Investment in Iran

Investment as one of the main components of aggregate demand has a substantial effect on business cycle and economic growth. This paper examines the effects of fiscal policy uncertainty on private investment in the context of the Iranian economy. In doing so, an ARDL model and time series data for the period 1973-2009 have been used. To estimate uncertainty, we construct two indices that quantify fiscal policy uncertainty by using the GARCH(p, q) technique. Then, we use them as explanatory variables to estimate their effects on the private investment in two separate models.The results indicate that uncertainty has negative effect on private investment behavior. However, uncertainty index constructed by using government budget deficit volatility reduces investment in short run, the other index has a long run negative effect. Moreover, among control variables, government investment and real exchange rate have significant effect on private investment in short run and long run.