Document Type : Research Paper

Authors

• Soleiman Faizi Yingjeh ¹
• Ebrahim ghaed ²
• Mohammad Salmani ³
• Mahdiyeh Rahimdel Goltapeh ³

¹ Assistant Professor, Department of Economics, Urmia University

² Ph.D Student in Monetary- International Economics, Faculty of Economics and Administrative Sciences, Ferdowsi University of Mashhad, Mashhad, Iran

³ MS.c in Theoretical Economic, Faculty of Economics and Management, Urmia University, Urmia, Iran

Abstract

The relationship between budget deficit and inflation is one of the topics that are discussed and investigated at the macroeconomic levels. Budget deficit policy is one of the financial policy tools in many countries. Statistical evidence related to experimental research on inflation rate variables and the ratio of the government budget deficit to the production of the countries of the world show that the relationship between the government budget deficit and inflation is not the same for all countries and considering that Iran's economy has always faced a budget deficit and Along with this situation, there has been a continuous trend of inflation. Inflation impacts on budget deficit through the revenue and government expenditure. The aim of this study is investigating the threshold effect of inflation rate on budget deficit with Smooth Transition Regression (STR) Approach and annual data during the period of 1979-2021. The results show that the sum of inflation coefficients in the first and second regimes has had positive effects on the budget deficit. On the other hand, the sum of exchange rate coefficients in the first and second regimes has increased the budget deficit, which shows that the exchange rate in both regimes has alignment effects on the budget deficit. Other results indicate that the sum of economic growth rate coefficients in both the first and second regimes has reduced the budget deficit. Finally, the sum of oil revenue coefficients in the first regime had a negative effect and in the second regime had a positive effect on the budget deficit. Therefore, based on the results presented, the policy recommendation is that, considering that the budget deficit itself is also the cause of inflation, if the government implements financial discipline and downsizing, both inflation and budget deficit will decrease.

Keywords

• Threshold Effect
• Inflation Rate
• Budget Deficit
• Smooth Transition Regression (STR) approach

Main Subjects

• Macroeconomics