The Effects of Different Methods of Budget Deficit Financing on Macroeconomic Variables in Iran

Economic stability is one of the most important subjects in macro economy which widely depends on government policies such as financing budget deficit, whereas government budget is an instrument for access to higher economic growth and price stability. If governments tend to achieve these goals, they should take into consideration how to allocate the annual budget. The question which should be answered is whether governments can increase budget deficit to achieve these goals. Before answering this question, two preliminary questions should be answered. Which sources will the deficit provide? and in what economic sectors will the deficit be spend? Experiences in oil-rich developing countries such as Iran show that in many years, the biggest part of budget deficit financing has been through oil revenues, but in recent years, oil-rich developing countries have tried to increase the share of debt securities in financing budget deficit. The goal of this paper is to evaluate the effects of different methods of budget deficit financing on inflation and economic growth in Iran using VARX model and expanding window estimation method. The results show that the effects of budget deficit on economic growth depend directly on the method of budget deficit financing in a way that when the most part of financing is through exchange reserve account, the effects of budget deficit on economic growth is positive and its severity is increasing. When the most part of financing is through selling government corporations, the effect of budget deficit on economic growth is positive, however, its severity is decreasing. And when the most part of financing is through selling debt securities, the effect of budget deficit on economic growth will be positive. The policy advice of the paper is that if the government tends to decrease the share of oil revenue in financing budget deficit, the best alternative is to increase the share of debt securities. The last result of the paper is that when the most part of financing of budget deficit is through exchange reserve account, there is no significant effect of budget deficit on inflation, but when the two other methods of financing play the biggest role, budget deficit increases inflation.