Investigating Iran's debt sustainability using policymaker reaction function and nonlinear causality

Debt sustainability is the core part of government fiscal sustainability in theory. Many countries have faced economic crises due to the high level of public debt. The rising trend of Iran’s public debt shows that in a short time debt sustainability is going to be a policy challenge. This study investigates the debt sustainability in Iran in the 1353 to 1398 period. In this regard, Bohn's (2008) method has been used to reveal if the government responds properly to rising Debt by reducing the primary deficit. In order to check for nonlinear relation, Hemistra and Jones (1994) test for nonlinear Granger causality, and the newer version of it by Diks and Panchenko (2006) was applied to the data series. The result indicates no response to the rising debt. I other words, the government does not care about the debt level and the primary deficit is not affected by the debt level.