The Long and Short Run Relationship between Government Revenue and Expenditure in Iran: IN THE PRESENCE OF STRUCTURAL BREAKS

Document Type : Research Paper

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Abstract

The relationship between government revenue and expenditure is an important subject in public economics especially for Iran, which is suffering from persistent budget deficits. Regarding theoretical studies, there are essentially four schools of thought on the direction of causation between government expenditure and revenue. The main purpose of this study is to investigate theLong and short Run relationship between government revenue and government expenditure in Iran that covers data from 1987- 2011 by use of Toda-Yamamoto approach. Since the Iranian economy has been subjected to a multitude of structural changes and regime shifts during the sample period, time series’ properties of the data are first analysed by Zivot-Andrews (1992) and Lee – Strazicich (2003,2004) model. The results of the Zivot and Andrews and Lee – Strazicich models indicate that all series under investigation are non-stationary at level. However, it is evident from the results of Zivot and Andrews and Lee – Strazicich tests that government revenue and expenditure are stationary at first difference because null hypotheses of unit roots for all the variables are rejected at 1 percent significance level. Taking into account the resulting endogenously determined structural breaks, the Saikkonen and Luetkephol (2000), Gregory and Hansen, cointegration approach and Auto regressive distributed lag are then employed to determine the long-run Relationship between Government Expenditure (GE) and Government Revenue (TR). This cointegration technique accommodates potential structural breaks that could undermine the existence of a long-run relationship between Government Expenditure and Government Revenue. The results of this paper support the Freidman (1978) hypothesis that government revenues cause expenditure and revenues have a positive causal impact on government expenditure.

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References

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