Non-Linear Analysis of Factors Affecting Iran's Economic Growth: Evidence from Markov Switching Approach

Achieving a high and stable economic growth rate is a prerequisite for the development process and recognizing the factors affecting growth is one of the goals that is in the focus of economic planners. Therefore, the purpose of this study is to investigate some of the most important variables affecting Iran's economic growth using the Markov regime change approach during the period 1988-2019, in which Iran's economic growth split into two regimes of positive and negative economic growth. Findings of the present study confirm the non-linearity of Iran's economic growth model and its influential variables. In addition, the results show the behavioral asymmetry of the explanatory variables of the model in periods of positive and negative economic growth. Thus, a positive and significant effect of exchange rate, inflation, budget deficit and oil prices on Iran's economic growth rate in the zero regime (positive economic growth period) has been obtained, but in regime one (negative economic growth period), a negative effect. Likewise, the variables of inflation rate and exchange rate and the positive effect of budget deficit and oil price variables on Iran's economic growth rate are observed. Therefore, the implementation of exchange rate control policies in periods of negative economic growth becomes more necessary and sensitive. Furthermore, the duality of inflation rate behavior in the two regimes and its negative effect in regime one, indicates the need to monitor the market and control the general level of prices in periods when Iran's economic growth is negative. The positive impact of the budget deficit on growth in both regimes is a confirmation of the continued implementation of expansionary fiscal policies in the Iranian economy. Finally, the results of the probability transition matrix confirm the institutionalization of recession behavior in the Iranian economy, and the probability of remaining in recession is much higher than the probability of exiting it in the future.