Estimating the government spending multiplier in the Iran : The application of the Time-Varying Parameters Vector Autoregression (TVP-VAR) model

Document Type : Original Article

Authors

1 Professor, Department of Theoretical Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran. (

2 Ph.D. Student, Department of Theoretical Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran.

Abstract

The use of fiscal policies with an impact on the gross domestic product allows governments to step in the direction of economic stability by reducing or increasing production in the necessary conditions. However, the effectiveness of fiscal policy is one of the most controversial topics among economists and researchers. The government spending multiplier is one of the things that determine the effectiveness of fiscal policy, and according to the changes in the parameters of the economic model over time, the estimation of the government spending multiplier over time is very important for the effect on the economy. Therefore, in this paper, the estimation of the government spending multiplier in Iran's economy with the TVP-FAVAR with seasonal data is discussed. The results show that the size of the government spending multiplier fluctuates between the values of 0.63 and 2.3 in the investigated time period. Most of these changes are caused by cyclical factors of the economy. On the other hand, structural factors play a minor role in the results. Therefore, according to the findings of the research, for the effectiveness of fiscal policy, more attention should be paid to the state of the economy in business cycles than other factors

Keywords

Main Subjects

References

  1. Andrew Binning. (2024). Calculating Government Consumption Multipliers in New Zealand Using an Estimated DSGE Model. New Zealand Treasury Working Paper, 24/01.
  2. Arin, K. P., Koray, F., & Spagnolo, N. (2015). Fiscal multipliers in good times and bad times. Journal of Macroeconomics, 44, 303-311. https://doi.org/10.1016/j.jmacro.2015.05.001
  3. Batini, N., Eyraud, L., Forni, L., & Weber, A. (2014). Fiscal multipliers: Size, determinants, and use in macroeconomic projections. Fiscal Affairs Department of International Monetary Fund, September 2014.
  4. Baum, A., & Koester, G. B. (2011). The impact of fiscal policy on economic activity over the business cycle: Evidence from a threshold VAR analysis. Deutsche Bundesbank Discussion Paper Series, 03/2011. https://doi.org/10.2139/ssrn.1851187
  5. Blanchard, O., & Perotti, R. (2002). An empirical characterization of the dynamic effects of changes in government spending and taxes on output. The Quarterly Journal of Economics, 117(4), 1329-1368. https://doi.org/10.1162/003355302320935043
  6. Charles, S., Dallery, T., & Marie, J. (2015). Why the Keynesian multiplier increases during hard times: A theoretical explanation based on rentiers' saving behaviour. Metroeconomica, 66(3), 451-473. https://doi.org/10.1111/meca.12088
  7. Debuque-Gonzales, M. (2021). Local fiscal multipliers and spillover effects: Evidence from Philippine regions. Economic Systems, 45(4), 100764. https://doi.org/10.1016/j.ecosys.2021.100764
  8. Destefanis, S., Coppola, G., Di Serio, M., & Fragetta, M. (2023). Fiscal multiplier in recession and expansion: An analysis for the Italian regions. Unpublished manuscript.
  9. Doz, C., Giannone, D., & Reichlin, L. (2011). A two-step estimator for large approximate dynamic factor models based on Kalman filtering. Journal of Econometrics, 164(1), 188-205. https://doi.org/10.1016/j.jeconom.2011.02.012
  10. Ezzati Shourghouli, A., Ahmadi, T., Sahraiee, P., & Rahimi, R. (2021). Investigating the effectiveness of government expenditures and taxes during business cycles: Application of threshold vector auto-regression model. Journal of Tax Research, 29(50), 27-53. (In Persian)
  11. Glocker, C., Sestieri, G., & Towbin, P. (2019). Time-varying government spending multipliers in the UK. Journal of Macroeconomics, 60, 180-197. https://doi.org/10.1016/j.jmacro.2019.01.001
  12. Gu, Y., & Lyu, P. (2013). Estimating tax and government spending multipliers in China. Applied Economics, 45(16), 2218-2227. https://doi.org/10.1080/00036846.2012.666858
  13. Heidari, H., & Saeidpour, L. (2015). Analyze the effects of fiscal policy shocks and fiscal multipliers of Iran’s economy in the New-Keynesian framework. Economic Growth and Development Research, 5(20), 78-61. (In Persian)
  14. Horvath, R., Kaszab, L., Marsal, A., & Rabitsch, K. (2020). Determinants of fiscal multipliers revisited. Journal of Macroeconomics, 63, 103162. https://doi.org/10.1016/j.jmacro.2019.103162
  15. Hosseinpur, M., Hozhabr Kiani, K., Zandi, F., Dehghani, A., & Saeedi, K. (2019). Estimating of the fiscal multipliers in Iran's economy and selected countries of MENA. Journal of Financial Economics (Financial Economics and Development), 13(48), 111-145. (In Persian)
  16. Ilzetzki, E., Mendoza, E. G., & Végh, C. A. (2013). How big (small?) are fiscal multipliers? Journal of Monetary Economics, 60(2), 239-254. https://doi.org/10.1016/j.jmoneco.2012.10.011
  17. Jiménez, A., Rodríguez, G., & Arellano, M. A. (2023). Time-varying impact of fiscal shocks over GDP growth in Peru: An empirical application using hybrid TVP-VAR-SV models. Structural Change and Economic Dynamics, 64, 314-332. https://doi.org/10.1016/j.strueco.2023.04.010
  18. Khezri, M., Shojaee, A. N., & Fotros, M. H. (2019). Investigation of the nonlinear effects of non-oil exports determinants in Iran using a model with variable parameters over time of TVP-VAR. Quarterly Journal of Quantitative Economics, 15(4), 113-134. (In Persian)
  19. Khodaparast Shirazi, J. (2014). Measuring the effects of monetary policy shock in Iran: A factor-augmented vector autoregressive (FAVAR) approach. Quarterly Journal of Quantitative Economics, 11(1), 75-101. (In Persian)
  20. Koop, G., & Korobilis, D. (2013). Large time-varying parameter VARs. Journal of Econometrics, 177(2), 185-198. https://doi.org/10.1016/j.jeconom.2013.04.009
  21. Moradi, Y., Shahbazi, K., & Feizi Ganje, S. (2023). The role of business cycles in determining fiscal policy multiplier (with emphasis on direct and indirect taxes): A case study of the Iranian economy. Journal of Financial Economics (Financial Economics and Development), 117-138. (In Persian)
  22. Nouferesti, M. (2005). Impacts of monetary and exchange rate policies on the Iranian economy within a dynamic macro econometric model. Tahghighat-e-Eghtesadi, 70, 1-29. (In Persian)
  23. Palley, T. I. (2009). Imports and the income-expenditure model: Implications for fiscal policy and recession fighting. Journal of Post Keynesian Economics, 32(2), 311-322. https://doi.org/10.2753/PKE0160-3477320208
  24. Pragidis, I. C., Tsintzos, P., & Plakandaras, B. (2018). Asymmetric effects of government spending shocks during the financial cycle. Economic Modelling, 68, 372-387. https://doi.org/10.1016/j.econmod.2017.07.015
  25. Rahmani, T., & Siahpoosh, S. M. (2019). Relationship between government expenditure multiplier and macroeconomic variables in Iran using the SVAR method. Journal of Applied Economics Studies in Iran, 8(31), 201-223. (In Persian)
  26. Ramey, V. A., & Zubairy, S. (2018). Government spending multipliers in good times and in bad: Evidence from US historical data. Journal of Political Economy, 126(2), 850-901. https://doi.org/10.1086/697194
  27. Riera-Crichton, D., Végh, C. A., & Vuletin, G. (2015). Procyclical and countercyclical fiscal multipliers: Evidence from OECD countries. Journal of International Money and Finance, 52, 15-31. https://doi.org/10.1016/j.jimonfin.2014.11.001
  28. Rodríguez, G. (2019). Time-varying impact of fiscal shocks over GDP growth in Peru: An empirical application using hybrid TVP-VAR-SV models. Unpublished manuscript, Pontificia Universidad Católica del Perú.
  29. Sharifi Ranani, H., Komeijani, A., & Shahrestani, H. (2009). Investigating the monetary transmission mechanism in Iran: A structural vector autoregression approach. Journal of Monetary and Banking Research, 2, 145-176. (In Persian)
  30. Soleyman, S., Falahati, A., & Rostami, A. (2016). Permanent and temporary components of stock returns: An application of state-space models with Markov switching heteroskedasticity. Journal of Economic Modelling Research (JEMR), 7(25), 69-90. (In Persian)
  31. Stock, J. H., & Watson, M. W. (2008). Phillips curve inflation forecasts. NBER Working Paper No. 14322. https://doi.org/10.3386/w14322

Files

History

  • Receive Date: 15 June 2024
  • Revise Date: 29 July 2024
  • Accept Date: 29 July 2024
  • Publish Date: 21 May 2024

Share

How to cite

Statistics