Long-Run and Short- Run Effects of Budget Deficit on Economic Growth in Iran

Nowadays, achieving high growth rate is seen as a major purpose for any economic system. The budget deficit policy in developing countries is considered as an important element in policy-making, and the effect of this variable on economic growth is particularly important. In this paper the empirical relationship between budget deficit and economic growth of Iran in the period 1980-2011 is analyzed in long and short run applying Johansen and Juselius co-integration method and vector error correction model (VECM). Results suggest that the impact of ratio of budget deficit to GDP on economic growth is negative and significant in the long run, and positive and significant in the short run; but in such a way that the negative effects in long-run are much stronger than the positive effects in short run. The results also show that in long-run, external debt has a negative significant effect on economic growth while public sector investment has a positive significant effect. However, in short run these two variables do not demonstrate any significant effect on economic growth.