Testing the Effect of Tanzi and Patinkin in Iran’s Economy

Iran's economy has been overwhelmed by problems such as budget deficit and chronic inflation in recent decades, which based on theoretical literature and experimental evidence, a bilateral relationship exists between these two factors. This study assesses the impact of inflation on the budget deficit, known as Tanzi effect. Due to this relationship, it is possible that increases and decreases in inflation have different impacts on government deficit (total and mixed). This study examines the asymmetric effect of inflation on budget deficit (total, operating, and capital) from 1190:2 to 2018:3, and testing the Tanzi effect in the meantime. To analyze and estimate the asymmetric relationship, a Nonlinear Autoregressive Distributed Lag has been used, which first used by Shin et al. (2014) to analyze an asymmetric relationship. The results show that increases and decreases in inflation have an indirect effect on the total and operating budget deficits in the long run, which indicates the Patinkin effect in Iran's economy. In addition, Tanzi and Patinkin effects have not been found in the capital budget deficit. Moreover, findings indicate that inflation has had a non-linear (asymmetric) effect on the total and operating budget deficits. Furthermore, government oil revenue has indirect effect on the total budget, direct one on the operational budget, and indirect one on the capital budget.