The size of government and economic growth in Iran 1971-2008

The aim of this thesis is to explore and study the interaction between the size of government and economic growth in Iran over the 1971-2008 periods. To achieve this aim, the thesis is designed to examine three models. In the first model which is based on Barro’s endogenous growth theory, we investigate the interaction between economic growth and government expenditures simultaneously by using Three Stage Least Squares (3SLS). In the second model, we investigate the impacts of government expenditures and the sources of finance of government expenditures on economic growth. This analysis is based on Autoregressive Distributed Lag (ARDL) model. In model three, we investigate the effect of the government budget deficit, liquidity (M2) and official exchange rate on price level in Iran. Over all, the major contribution of this thesis is to show that total government expenditures and current expenditures have a negative and significant impact on economic growth, but that investment expenditures have a positive and insignificant impact on economic growth. In the short run current expenditure have a negative and significant impact but, investment expenditures have positive and significant effect on economic growth. In the long run, investment expenditures have a positive and significant effect but the current expenditures have a negative and insignificant effect on economic growth. In the short run the interaction term for financing government spending through oil revenues is positive and significant. The impact of tax revenues is positive but insignificant and the impact of borrowing from central bank on economic growth is negative. In the long run the interaction term for financing government spending through oil revenues is positive and significant. The impact of tax revenues is positive and significant and the impact of borrowing from central bank on economic growth is negative. There is a stable long-run relation between inflation, budget deficit, money supply and exchange rate. Increase in budget deficit has a positive effect on the inflation rate in long run, but in short run increase in budget deficit does not have a positive effect on the inflation rate. Increase in liquidity (M2) has a positive effect on the inflation rate in long run and increase in official exchange rate has a positive effect on the inflation rate in long run