Crowding out or Crowding in? Government Spending Effects on the Private Sector in Iran

Given that changes in interest rates can only partly empower financial authorities to enhance the country’s economy, there has been a major shift toward outcomes of fiscal policies, particularly after the big financial crises and the global recession. Thus, the government’s spending plans are implemented to motivate the economy. The present study aims to investigate government expenditure shocks on consumption spending, private investment, and financial cycles during 2005-2018 using the Structural Vector Auto Regression (SVAR) model. The findings indicate that there is no significant relationship between government expenditure shocks and consumption spending and private investment. The findings show a crowding out effect between government spending shock and the private sector in Iran. However, you can see a positive relationship between GDP and the private sector. Moreover, these shocks can lead to a positive impact on GDP accordingly. However, government expenditure shocks may only have short-term effects on business cycles because of the instabilities and uncertainties in government spending.
JEL Classification: H11, H3, H5.