The Impacts of Budget Deficit and Inflation on Private Investment in Iran (Using Smooth Transition Regression Model)

Using smooth transition regression model, this study investigates the relationship between government budget deficit and private investment in Iran. Private investment is a function of inflation and government budget deficit. The annually time series data between 1971 to 2009 are obtained from central bank of Iran. Regarding inflation as transition variable, the study results show that, there is a nonlinear relation between private investment and government budget deficit. The threshold level of inflation as transition variable is 15.8 percent and transition speed is 10. In first threshold regime, inflation does not have a significant impact on private investment, but in second one has a negative significant effect on. The government budget deficit in the first and second regimes has positive and negative significant impacts on private investment, respectively. Also, based on the validation tests, the obtained results are reliable. Finally, model results show that in the period under review the budget deficit in Iran crowds out private investment.