The Effect of Fiscal Policy on Inflation with Emphasis on Financial Sector Stress

Document Type : Research Paper

Authors

1 M.Sc. Department of Financial Management, Faculty of Management and Economics, Tehran Science and Research Unit, Islamic Azad University, Tehran, Iran

2 Assistant Professor, Department of Accounting and Management, Shahryar Branch, Islamic Azad University, Shahryar, Iran

3 Assistant Professor, Department of Banking Studies, Monetary and Banking Research Institute, Central Bank, Tehran, Iran

10.22051/ieda.2024.46242.1401

Abstract

Inflation is a macroeconomic variable that affects all levels of society. One of the goals of macroeconomic policymakers is to control inflation. The importance of this issue is such that a wide range of recent studies have been conducted on the effect of fiscal policy on inflation in conditions of financial stress at the international level. In Iran as well, inflation is a concern for economic policymakers, and its susceptibility to financial sector stress is no secret. Fiscal policies of the government are among the policies that can help control inflation.
Given the importance of the issue, this paper examines the threshold effect of fiscal policy on inflation in the presence of financial stress by using quarterly data on macroeconomic variables in the period 1380-1401. For this purpose, the paper extracts the financial stress criterion and its critical threshold using the threshold model. The critical threshold of tax revenue in different financial stress regimes is also extracted.
The results of the study indicate that tax revenue intensifies inflation in conditions of high financial stress. In addition, tax revenue has a negative effect on inflation when financial stress is low; however, if financial stress is high, an increase in tax revenue increases inflation

Keywords

Main Subjects

References

 
ابراهیمی شقاقی، مرضیه و اسلامی مفیدآبادی، حسین. (1400). تأثیر استرس مالی بر پیش‌بینی شاخص‌های کلان اقتصادی (شواهدی از اقتصاد ایران). فصلنامه تحلیل بازار سرمایه، 1(1)، 84-55.
ابراهیمی، نسرین؛ پدرام، مهدی و موسوی، میرحسین. (۱۴۰۰). اثر سیاست مالی روی نرخ بیکاری و نرخ تورم در استان‌های ایران: رویکرد GVAR. مدلسازی اقتصادی، 15(53)، 48-25.
تقی زاده، حمید؛ شریفی رنانی، حسین و قبادی، سارا. (1400). ارزیابی ثبات مالی در اقتصاد ایران تحت سیاست های پولی و کلان احتیاطی. فصلنامه علمی پژوهشی راهبرد اقتصادی، 10(36)، 176-145.
رضازاده، روح اله و فلاح، میرفیض. (1399). بررسی سرریز نوسانات شاخص استرس مالی بر تورم، نرخ بهره، نقدینگی و شاخص صنعت با تأکید بر مدل های GARCH-BEKK، VAR و علیت گرانجر. مهندسی مالی و مدیریت اوراق بهادار، 11(42)، 301-272.
سید حسین زاده یزدی، مجتبی؛ عرفانی، علیرضا و قائمی اصل، مهدی. (1399). تحلیل حساسیت و رتبه‌بندی عوامل مؤثر بر ثبات مالی ایران در چارچوب ساخت شاخص ترکیبی. مجله تحقیقات اقتصادی، 55(1)، 85-57.
قادری مقدم، رضا؛ باصری، بیژن؛ فلیحی، نعمت و عباسی، غلامرضا. (1401). ارزیابی اثرگذاری نااطمینانی ناشی از تورم و رشد اقتصادی بر مصرف نفت و گاز در ایران. اقتصاد مالی، 16(59)، 74-47.‎
قاسمی، حسام‌الدین و عرب مازار، عباس. (1400). بررسی تأثیر سیاست‌های اقتصادی بر شاخص تاب‌آوری بودجه دولت در چارچوب یک الگوی اقتصادسنجی کلان پویا. اقتصاد باثبات، 2(4), 28-1.
 
References
Afonso, A., Baxa, J., & Slavík, M. (2018). Fiscal developments and financial stress: a threshold VAR analysis. Empirical Economics, 54(2), 395–423.
Apostolakis, G. N., Floros, C., Gkillas, K., & Wohar, M. (2021). Financial stress, economic policy uncertainty, and oil price uncertainty. Energy Economics, 104, 105686.
Balakrishnan, R., Danninger, S., Elekdag, S., & Tytell, I. (2011). The transmission of financial stress from advanced to emerging economies. Emerging Markets Finance and Trade, 47(sup2), 40-68.
Baldacci, E., McHugh, J., & Petrova, I. (2011). Measuring fiscal vulnerability and fiscal stress: a proposed set of indicators. IMF Working Paper, No. 2011/094.
Bizzaro, L. (2022). Fiscal policies, output growth and financial stress regimes: a threshold VAR approach. [Master’s thesis, Nova School of Business & Economics].
Cevik, S & Miryugin, F. (2023). It’s never different: fiscal policy shocks and inflation. International Monetary Fund Working Paper, No. 2023/098
Chandia, K. E., Iqbal, M. B., & Bahadur, W. (2022). An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study. Fulbright Review of Economics and Policy, 2(1), 35-60.
Clark, A., & Large, A. (2011). Macroprudential policy: addressing the things we don’t know, Group of Thirty, Occasional Paper No. 83, Washington, DC.
Cottarelli, C. (2011). The risk octagon: a comprehensive framework for assessing sovereign risks. Presentation at the Sapienza University in Rome on January, 25, 2011.
Demirel, U. D., & Wilson, M. (2023). Effects of fiscal policy on inflation: implications of supply disruptions and rconomic slack, Working Paper 2023-05 (No. 59056).
Dumičić, M. (2017). A brief introduction to the world of macroprudential policy. Journal of Central Banking Theory and Practice, 6(1), 87-109.
Ebrahimi shaghaghi, M., & Eslami Mofid Abadi, H. (2021). The effect of financial stress on forecast of macro economic indicators (evidence from of Iran's economy). Journal of Capital Market Analysis, 1(1), 55-84. (In Persian).
Ebrahimi, N., Pedram, M., & Mousavi, M. H. (2021). The effect of fiscal Policy on unemployment and inflation in provinces of Iran: a GVAR approach. Economic Modeling, 15(53), 25-48. (In Persian).
Fakher, H. A. (2016). The empirical relationship between fiscal deficits and inflation (Case study: Selected Asian economies). Iranian Economic Review, 20(4), 551-579.
Fischer, S., Sahay, R., & Végh, C. A. (2002). Modern hyper and high Inflations. Journal of Economic Literature, 40(3), 837–880.
Ghaderi Moghadam, R., Baseri, B., Falihi, N., & Abbasi, G. (2022). The role of inflation uncertainty on gas and oil consumption. Financial Economics, 16(59), 47-74. (In Persian).
Ghasemi, H., & Arabmazar, A. (2022). Investigating the impact of economic policies on the government budget resilience index in the framework of a dynamic macroeconometric model. Stable Economy Journal, 2(4), 1-28. (In Persian)
Hanschel, E., & Monnin, P. (2005). Measuring and forecasting stress in the banking sector: evidence from Switzerland. BIS papers, 22, 431-449.
Hemming, R., & Petrie, M. (2000). A framework for assessing fiscal vulnerability. International Monetary Fund Working Paper, No. 2000/052.
Jorgensen, P. L., & Ravn, S. H. (2022). The inflation response to government spending shocks: A fiscal price puzzle?. European Economic Review, 141, 103982.
Kasal, S. (2023). What are the effects of financial stress on economic activity and government debt? An empirical examination in an emerging economy. Borsa Istanbul Review, 23(1), 254-267.
Koh, W. C., Kose, M. A., Nagle, P. S. O., Ohnsorge, F., & Sugawara, N. (2020). Debt and financial crises. Working Paper, No. 2001.
Korliras, P. G., & Monogios, Y. A. (2010). Asymmetric fiscal dynamics and the significance of fiscal rules for EMU public finances. The Journal of Economic Asymmetries, 7(2), 139-169.
Leeper, E. M. (1991). Equilibria under ‘active’and ‘passive’monetary and fiscal policies. Journal of monetary Economics, 27(1), 129-147.
Li, F., & St-Amant, P. (2010). Financial stress, monetary policy, and economic activity (No. 2010-12). Bank of Canada.
Lopez-Martin, B., Ramírez de Aguilar, A., & Samano, D. (2018). Fiscal policy and inflation: Understanding the role of expectations in Mexico. Working Papers No. 2018-18.
Nguyen, T. T., Phan, T. D., & Tran, N. A. (2022). Impact of fiscal and monetary policy on inflation in Vietnam. Investment Management and Financial Innovations, 19(1), 201-209.
 Obstfeld, M. (2013). On keeping your powder dry: fiscal foundations of financial and price stability. Centre for Economic Policy Research.
Popova, S., Karlova, N., Ponomarenko, A., & Deryugina, E. (2017). Analysis of the debt burden in Russian economy sectors. Russian Journal of Economics, 3(4), 379–410.
Rezazadeh, R., & Falah, M. (2020). Examining the overflow of financial stress index fluctuations on inflation, interest rate, liquidity and industry index using GARCH-BEKK and VAR models and Granger causality. Financial Engineering and Portfolio Management, 11(42 ), 272-301.
Seyed Hosseinzadeh, M., Erfani, A., & Ghaemi Asl, M. (2020). Sensitivity analysis and ranking of factors affecting Iranian financial stability in the framework of composite index Construction. Journal of Economic Research (Tahghighat- E- Eghtesadi), 55(1), 57-85. (In Persian).
Sims, C. A. (1994). A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy. Economic Theory, 4(3), 381–399.
Surjaningsih, N., Utari, G. A., & Trisnanto, B. (2012). The impact of fiscal policy on the output and inflation. Bulletin of Monetary Economics and Banking, 14(4), 367-396.
Taghizadeh, H., Sharifi Renani, H., & Ghobadi, S. (2021). Assessing ginancial stability in the Iranian economy under monetary policy and macroprudential policy. Economic Strategy, 10(36), 145-176. (In Persian).
Woodford, M. (1995, December). Price-level determinacy without control of a monetary aggregate. In Carnegie-Rochester conference series on public policy (Vol. 43, pp. 1-46). North-Holland.
Woodford, M. (2010). Optimal monetary stabilization policy. Handbook of monetary economics, 3, 723-828.
Iranian Economic Development Analyses
Volume 9, Issue 2 - Serial Number 24
October 2023
Pages 169-192

Files

Share

How to cite

Statistics