The Asymmetric Impact of Government Budget Deficits on Economic Growth in Iran: Application of Smooth Transition Regression (STR) Model

There are different views on explaining the theoretical relationship between government budget deficit and economic growth. The lack of a general consensus on this subject has led to great amount of empirical studies in this area. Many studies have reported controversial results based on factors such as country specifications and time periods, and budget deficit financing methods. Due to ambiguities surrounding the theoretical and empirical analysis the present paper uses Smoothed Transition Regression (STR) model to examine an asymmetric impact of government budget deficit on economic growth in Iran based on seasonal data during of 2010:4 -1980:1. The results indicate that budget deficit in a two regimes structure has affected Iran’s economic growth. In this structure, during recession (with an economic growth less than 37.3 percent) a larger share of budget deficit to GDP, Consistent with the Keynesian view, the budget deficit has a positive effect on economic growth. On the contrary in economic boom (with an economic growth more than 37.3 percent), witnessing a negative effect on economic growth which support the neoclassical view.