Reflections on Correlation between the Inflation and Economic Growth and the Deficit in Public Budget

Document Type : Research Paper

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Abstract

Addressing issues such as inflation and economic growth is not only specific to Iran; it can be found in all industrializing and developing countries in different ways. Governmental performance strongly affects prices as well as economic stability. Thus, , in order to explain the correlation between the public budget, inflation and economic growth, this article uses a model based on theoretical foundations, previous studies in developing countries and economic realities. Factors considered in this article includes the general level of prices, government spending, government's non-oil revenues, the volume of money, actual domestic production and an equation specifying inflationary expectations  Using annual data for the period from 1976 to 2011 and utilizing a system of simultaneous equations and two-step method of least squares (2SLS), this model is tested and evaluated.  
The results of this study suggest that deficit in Iranian public budget has led to inflation, brought about regression and slowed down economic growth. Iran is a country dependent on revenues from crude oil exports. Thus, policy-makers and planners in the public sector should give up the reliance on oil revenues, reform the structure of tax revenues, provide the annual budget bills correctly and finally contract the size of public sector. 

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References

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