Investigating the Interplay Between Budget Deficit Uncertainty and Economic Growth in Iran: An Application of Continuous Wavelet Analysis

Document Type : Research Article

Authors

1 M.A. Student in Economics, Department of Economics, Faculty of Management and Economics, University of Guilan, Rasht, Iran.

2 Assistant Professor, Department of Economics, Faculty of Management and Economic, University of Guilan, Rasht, Iran.

10.22034/jepr.2025.144234.1293

Abstract

For resource-dependent economies such as Iran, which are confronted with severe revenue fluctuations and structural instabilities, understanding the relationship between budget deficit uncertainty and economic growth is of paramount importance. This uncertainty fosters an unpredictable environment for economic agents, thereby influencing macroeconomic decisions regarding investment and consumption. Conversely, developments in the real sector can impact the government's revenue and expenditure instruments, which in turn can stimulate uncertainty about the budget deficit.In this context, the present study employs Continuous Wavelet Transform and time-frequency domain analysis to investigate the connection between the uncertainty of the operating budget balance and economic growth over the period 1991–2022. Key findings indicate an asymmetric and business-cycle-sensitive relationship. During periods of economic boom, particularly those driven by oil revenues, economic growth tends to exacerbate future budget uncertainty. Conversely, during periods of recession and sanctions, this uncertainty becomes a constraining factor, weakening investment and deepening the recession. This dynamic reveals an "instability trap" wherein the economy oscillates between unsustainable growth and deep recession. Crucially, no significant long-term relationship was identified, suggesting that these cyclical fluctuations do not determine the long-run growth trajectory of the economy.

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Economic Policies and Research
Volume 4, Issue 4 - Serial Number 16
December 2025
Pages 137-163

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History

  • Receive Date: 03 August 2025
  • Revise Date: 11 November 2025
  • Accept Date: 16 November 2025
  • Publish Date: 22 December 2025

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