The Effects of Fiscal and Monetary Policies on Iranian Business Cycle Dynamics with Time Varying Markov Switching Models

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