Analysis of the relationship between inflation and the government budget deficit in Iran's economy: a wavelet coherence approach

In Iran's economy, the continuation of inflation and the government's budget deficit can be seen, but how these two categories are related is worthy of discussion. In the present study, the relationship between budget deficit and inflation in Iran during the years 1991 to 2022 was investigated using the continuous wavelet transform approach. We have also analyzed this relationship regarding the net debt of the government to the central bank, the debt of the government to the central bank and inflation. Our findings indicate a positive and significant effect of inflation on the budget deficit. We have also found a positive and significant effect of inflation on the government's net debt and the government's debt to the central bank in the long term. The obtained results indicate that high inflation in unstable conditions causes an increase in the government's budget deficit. Because the government itself is the biggest consumer, and due to the Olivera-Tanzi effect, government expenses increase immediately with inflation, but government revenues are adjusted with a delay compared to inflation. Therefore, inflation puts pressure on the budget deficit and government debt to the central bank through government spending and increases it.