Government Financial Sustainability in Iran with Cointegration Approach

Government financial sustainability refers to government flows of revenues and expenditures. According to the monetary theory of the price-level (MTPL) and financial theory of the price-level (FTPL), it can be stated that causes of increase in price level are government financial debt and monetary provision of debt. The purpose of this study is to investigate the financial sustainability of the government deficit. In order to investigate this relationship and because of dynamics of the model, dynamic cointegration models and dynamic ordinary least square models (DOLS) are applied. For this purpose, we used data from the annual period 1971 -2013. Empirical results for the variables indicate that variables for government’s expenditures and government’s revenues are first order cointegrated which suggest that there exists a long run relationship between the variables. For this purpose, three kinds of government revenues including tax revenues, taxes, and oil revenues, and tax incomes, oil and seigniorage are regressed over costs which result in weak financial sustainability, strong financial sustainability and inconsistency in government financial sustainability, respectively. Therefore, it is recommended that in order to maintain financial sustainability, governments invest oil revenues, to the extent possible, in capital assets and by reforming their cost structures attempt to balance their income and cost flows. Also, since government financial debt and debt financing through seigniorage are two important reasons for inflation, governments should be more disciplined in their financial structure.