Budget Deficit and Inflation: A Sensitivity Analysis to Inflation and Money Supply in Iran

Abstract

2 Abstract: Investigation The relationship between budget deficit and inflation is one of the most important issues in macroeconomics. The main purpose of the study that is the relationship between budget deficit and inflation which is generally ambiguous from the theoretical perspective. This paper surveyed the relationship between budget deficit and inflation in Iran using the quarterly data covering the period 1990-2008. We have also analyzed the robustness or fragility of this relationship regarding the definitions of inflation and supply money. To do so, we used the simultaneous equation model, including four structural equations for budget deficit, monetary base, money supply and inflation. Our findings indicate a positive and significant impact of the budget deficit on monetary variables and as result on inflation. We have also found a positive and significant impact of price index on budget deficit. Finally regarding the sensitivity analysis our findings support the robustness of our estimation results with respect to definitions of inflation as well as money supply.

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