An Analysis of Fiscal Dominance in the Economy of Iran: Case Study of Annual Budget Laws

One of the most important issues in monetary policy, is to adopt fiscal policies consistent with the objective of economic stability, monetary discipline and controlling inflation. In order to achieve these objectives, institutional and economic tools necessary for decision-making, must be put at the disposal of the monetary authority to avoid fiscal dominance. Otherwise, short-term fiscal and budgetary objectives will be preferred over the long-term monetary stability in economy. The question that arises is whether the particular set of laws and duties related to the monetary and banking system, in the annual budget laws, acts in the line with this objective or indicate the dominance of fiscal policies over monetary policy. Investigation of the annual budget laws demonstrate a strong fiscal dominance through multiple tasks assigned to monetary and banking system. These include the obligation to purchase foreign exchange revenue, determining the official exchange rate, involvement in the spending of national development fund, the creation of new credit lines, credit assignments to banking system, etc. this has caused inefficiency in monetary and foreign exchange policy. Examination and Pathology of this challenge and providing guidelines for solving it, is the aim of the present study.