The macro-economic effects of the government debts to the Central Bank in Iran

In the Iranian economy, a part of the financial needs and liabilities of the government is always financed by the Central Bank. With an increase in the government debts to the Central Bank, monetary policy gets passive and implemented in line with fiscal policies. Consequently, the functions of the monetary policy are disrupted, and it deviates from its goals. This can have undesirable impacts on the macro-economy. So, this study aims at the macroeconomic effects of the government debts to the Central Bank in Iran during the period of 1973-2017. To this end, a SVAR model is used. The result of the research showed that the government debt to the Central Bank has had no significant effect on the ratio of aggregate demand to aggregate supply, real exchange rate and the relative price of non-tradable goods to tradable goods, but it has significantly increased the prices over a period of three years and decreased the GDP over two years. In the long run, the government debt to the Central Bank has explained 10.8 percent of variation in the general level of prices and 11.25 percent of variation in the GDP per person. These results indicate that the Fiscal Dominance and the Fiscal Theory of Price Level ‎can account for this situation in the Iranian economy.