Fiscal Policy Uncertainty and Economic Activities in Iran's Provinces

International Journal of Business and Development Studies, 2024

Industrial investment in Iran, especially in the wake of sanctions’ intensification in the 2010s, decreased significantly. The government implemented fiscal policy which has been associated with uncertainty. In this paper, using a dynamic panel model and generalized method of moments, we examined the effect of fiscal policy uncertainty on investment in 24 industrial groups in Iran over the period 2002-2020. The results indicated that the growth of fiscal level shock, resulted in a low but positive effect on investment directly. However, the coefficient of cross effect between the growth of fiscal level shock and the fiscal policy uncertainty undermined the positive effect on industrial investment. The government has had two effects on industrial investment indirectly through the demand side shock. By creating demand, it has had a positive effect on industrial investment with the cross effect between the growth of the fiscal level shock and industrial sales. However, on the other hand, the growth of the fiscal level shock has been associated with the creation and growth of fiscal policy uncertainty, so that the cross effect between the growth of fiscal policy uncertainty and the growth of industrial sales on industrial investment shows a high negative coefficient. The results of these two effects suggest that due to high uncertainty, the indirect government effect on investment in 24 industrial groups is negative, which happens through the demand-side shock. Moreover, the growth of fiscal policy uncertainty, sanctions, and interest rates, respectively, have had the most adverse effect on investment in 24 industrial groups in Iran.

Uncertainty or shocks in macroeconomic policies have always been a debated issue in all over the economies because these shocks severely influence the growth of economies. To analyze the impacts of these shocks in the context of Pakistan, the present study considers the role of fiscal and monetary policy uncertainty in economic activities by taking the time series data throughout, for 1971 to 2020. In this regard; GARCH and ARDL Cointegration model applied, empirical evidence reveals that in long run, fiscal uncertainty in terms of government expenditure positively affects the economy and monetary uncertainty in terms of money supply negatively affects the economy. While in the short run, uncertainty of both policies have negative influence on economic the growth of Pakistan. The study used other factors, i.e. exchange rate, interest rate and inflation. These factors also positively and significantly sway the growth in the long run. The outcomes suggest that policymakers in Pakistan should pay close attention to reducing uncertainty and shocks in macroeconomic policies. Especially, they should focus on transparency and effective management of monetary policy decisions about liquidity management and interest rate predictability. By providing a more stable and predictable policy environment, policymakers can promote economic growth and stability.

International journal of social sciences, 2013

This paper studies impact of government expenditures shocks on Gross Domestic Product (GDP), personal consumption, trade balance and effective exchange rate. To the purpose, time series data of Iranian macroeconomic variables were used covering from 1976 to 2007. Vector autoregressive (VAR) model, forecast error variance decomposition and momentary reaction functions were used in order to study the impact of government expenditures shocks on macroeconomic variables of Iranian economy. Extracted results from the estimate of VAR model and analyses of forecast error variance decomposition showed that: positive shocks of the government expenditures increase GDP and personal consumption but decrease trade balance. Impact of government expenditures positive shocks decrease effective exchange rate only in first year then government expenditures shocks had positive but very little impact on effective exchange rate

2017

The purpose of this article is to analyze the macroeconomic impacts of fiscal policy in Iran using a new-Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. The model takes into account distortionary taxations on wage, dividend, and consumption, while government expenditures are broken down into consumption of goods and services, and investment. The model is calibrated for Iran based on the estimated parameters by Bayesian method. To do so, a data set from 1981 to 2016 is used. The impulse response functions illustrate that an increase in consumption tax rate has a larger impact on the contraction of the economy than wage tax rate whereas the expansionary effects of government investment is much larger than government consumption expenditures.

2016

During the Great Recession of 2007-2009 uncertainty in the United States reached historically high levels. This paper analyzes the effectiveness of fiscal policy under different uncertainty regimes in the U.S. High uncertainty is known to make economic agents postpone their decisions on consumption and investment (real-options channel), making economic policy less effective. We use several uncertainty measures in a threshold vector autoregressive model (TVAR) to endogenously estimate different uncertainty regimes. Then we analyze the effectiveness of different fiscal policy shocks in each uncertainty regime. We measure uncertainty using S&P 100 volatility index (VXO) and Baa corporate bond yield relative to yield on 10-year treasury constant maturity (Baa10ym). Our benchmark model consists of aggregate government spending, taxes, uncertainty, and GDP. In addition to the benchmark model, we estimate three extensions. First, we differentiate between government consumption, investment,...

2010

This preliminary study characterizes the dynamic effects of shocks in government spending and taxes on macroeconomic variables in Pakistan. It employs a five variable structural Vector Auto regression model covering the time period 1973:1-2008:4 for the variables GDP, inflation, the interest rate ,net taxes and government expenditure. The identification of fiscal policy shocks is achieved through two approaches; the recursive approach proposed by Fatas and Mihov (2001), and the structural VAR approach proposed by Blanchard and Perotti (2002).

Journal of Eastern European and Central Asian Research (JEECAR)

The study aimed to empirically evaluate the effectiveness of fiscal policy in the context of the economic slowdown in Azerbaijan caused by the COVID19 pandemic. Using the Granger test, causal relationships between fiscal indicators and indicators of macroeconomic development in Azerbaijan have been determined. Presented an integrated assessment of the development of the national economy under the influence of the fiscal policy in the country. Using the regression analysis, fiscal risks have been identified that have a destabilizing effect on the economy and aggravating its state during a period of economic shock in the short term. The hypothesis about the different influence of the values of the public expenditure multipliers on the economy, depending on their functional directions, has been confirmed. The structure of expenses of the state budget of Azerbaijan has been empirically optimized, increasing production expenses.

This study investigates the dynamic effects of fiscal policy shocks in Pakistan by using structural vector auto-regressive (SVAR) model for annual time series data from 1972 to 2014. To identify the effects of fiscal shocks on macro economy, four different identification approaches has been used i.e. Recursive approach, Blanchard and Perotti approach, Sign Restriction and Event Study approach for two different lags. Both sets of impulse responses gives the same results and support Mountford and Uhlig (2005) that different lag order has no effects on the whole results. While the impulse responses of all identification approaches give different results criticized Caldara and Kamps (2006) that different identification methods given the same results. The most common results provided both government expenditure and revenue shocks showed that an expansionary fiscal policy increased output only for short and medium term at the cost of high prices and have no significant effects in the long run.

Social Science Research Network, 2020

This paper investigated the macroeconomic effects of fiscal policy shocks in Ethiopia using a Bayesian Vector Auto Regression model. We examined the dynamic responses of output, inflation, interest rate and exchange rate to fiscal policy shocks employing quarterly data from 2000/01Q1 to 2015/16Q4. The empirical evidence suggests that government spending shock had a positive impact on output and inflation but the effect was too small. Initially the interest rate responded negatively to government spending shocks and was positive with small effect and the nominal exchange rate showed deterioration. In addition, government revenue shocks had positive effect on real GDP and exchange rate and then they responded negatively. The inflation response to the net tax was medium and negative whereas its effect on interest rate was positive, and persistent. Furthermore, positive shocks to recurrent expenditure had a persistent positive impact on real output. Recurrent expenditure appeared not to be responsible for inflationary pressure. Interest rate picked up slightly as a result of recurrent spending shocks in the short run. The response of exchange rate to recurrent expenditure was small and remained negative. In contrast, capital expenditure was found to have an insignificant effect on output. The reasons could be the administrative lag and contractual bottleneck that are sometimes involved in executing capital projects and that appeared to be responsible for inflationary pressure. In the short term, the interest rate responded negatively and the estimated impact on exchange rate was insignificant. Following indirect tax revenue shocks the rise in output and inflation was very persistent. Regarding the effects of indirect taxes on interest rate and exchange rate our results show a clear and negative impactwhereas direct taxes were found to affect output and inflation very little and were insignificant. Initially, interest and exchange rates responded positively to direct tax shock later interest rate and exchange rate become insignificant and negative respectively. The results support the idea of a 'crowding-in' effect and when we take into account the feedback from government debt, the results suggest that the effects of fiscal shocks on the majority of macro variables is too small except for the real GDP for government revenue shock. Therefore, empirical evidence shows that it is important to consider government debt dynamics in the model.

2020

This paper analyzes the effects of fiscal policy shocks on a set of macroeconomic variables in Pakistan. The study adopts the SVAR framework and uses quarterly data of Pakistan from 1976:Q1 to 2018:Q4. Fiscal policy shocks are identified by incorporating the elasticity of fiscal variables as well as by taking decision lags in policy formulation to economic activity. The results showed that an increase in government developmental expenditure increases real GDP more than current expenditure, while current expenditure increases prices and developmental expenditure reduces prices. Prices are positively related with subsidies and defence expenditure, while negatively related with expenditure on social services. Tax revenue increases real GDP more than non-tax revenue, while tax revenue and non-tax revenue are both positively related with prices and negatively related with interest rate. An increase in direct tax has positive impact on prices and interest rate and negatively related with ...