This study examines empirical evidence of fiscal dominance and the relationship between government budget imbalance and liquidity growth in Iran over the period 1989–2024. Using the Nonlinear Autoregressive Distributed Lag (NARDL) approach, overall budget imbalance and its operational and capital components are decomposed into positive and negative shocks. The results indicate a positive and asymmetric relationship between overall budget imbalance and liquidity growth in both the short and long run, with positive shocks exerting stronger effects than negative shocks. Moreover, operational budget imbalance exhibits a stronger comovement with liquidity growth than capital budget imbalance, and the Wald test confirms a significant difference between their long-run coefficients. The Toda–Yamamoto causality test also indicates a unidirectional Granger causality from overall and operational budget imbalances to liquidity growth. The SVAR results are broadly consistent with the main findings. Overall, the evidence is consistent with the fiscal dominance hypothesis in Iran. The SVAR results are broadly consistent with the main findings. Overall, the evidence is consistent with the fiscal dominance hypothesis in Iran.