Optimum and threshold rates of public debt in Iran

Analysis of optimum and threshold rates of government debt in Iran and the effect of public debt on economic growth are the major purposes of this paper. As government debt is both economic and political phenomena, there are a lot of political economic literature that focus on some dimensions including and intergerneration redistribution, re-election of governments, , political budget cycles, , fiscal illusion, bargaining in legislation. Government debt effects on economic growth through six channels including government expenditure, interest rate, future tax, possibility of vicious triangle crises (debt, bank, and currency crises), and counter cycle policies. There are three points about the effect of government debt on economic growth. Some focuses on positive effect, some focuses on negative effect, and the last focuses on threshold effect. Using yearly data from 1974-2016 and with OLS approach, we show that the relationship between government debt and economic growth in Iran is inverse U, and the optimum rate of debt index (portion of government debt to GDP) in Iran is about 54.16 percent and the threshold level is about 108.32 percent. Moreover, it has been shown that from 1974 to the half of 1990’s, public debt to central bank was more than public debt to banking system, but after the middle of 1990’s this trend has been reversed.Comparison of the composition and the quality of public debts of Iran with other countries shows that major part of Iran’s public debt is short-run, while in developed countries, long-run debts are the major part, and as the portion of short-run debts goes up, the risk of dishonor increases; so it is necessary that some parts of Iran’s debt changes from short-run to long-run.