The Effects of Governance on Public Debt in Iran; Application of Smooth Transition Regression Model

The unprecedented increase of the debts level in all countries highlighted the role of governance on public debt. Theoretical and empirical literature has shown that countries with weak governance structures face the problem of separating monetary policy from debt management, so the necessity of good governance and strong institutional capacity can be effective in reducing the debt burden. This study examines the effect of governance on government debts in Iran's economy during the period of 1996-2022 using smooth transition regression model. The results showed that increasing the governance index in both linear and non-linear regimes had a positive and significant effect on government debts, with the difference that these effects were intensified in the second regime. The strong institutions can effectively help curb debt in countries due to the existence of strong financial frameworks and laws, but in countries with weaker institutions, due to the lack of regulatory frameworks, the lack of political stability and government effectiveness, the existence of corruption, etc., can lead to debt instability in the country. An important issue that has emerged in Iran in recent years and its consequences can be seen in all economic, social and political aspects of the country. This study showed that some of the negative consequences of economic variables are due to the weakness of government policies and government institutions to strengthen governance, which has caused a better environment to promote economic variables and bring declining economic growth and increasing debts to Iran.