Journal of Econometric Modelling

Journal of Econometric Modelling

Fiscal Dominance and Liquidity Growth in Iran: Evidence from Budget Imbalances and the Decomposition of Operational and Capital Imbalances

Articles in Press

Document Type : Original Article

Authors
Akbar Komijani 1
Mehdi Hadyan 2
Ali Tavassoli-Nia 3
1 Professor of Economics, Faculty of Economics, University of Tehran, Tehran, Iran
2 Assistant Professor of Economics, Monetary and Banking Research Institute, Central Bank of Iran, Tehran, Iran
3 Economic Researcher, Central Bank of Iran, Tehran, Iran
10.22075/jem.2026.41695.2089
Abstract
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.
Keywords
Budget Imbalance
Fiscal Dominance
Liquidity
Exchange Rate
NARDL
Journal of Econometric Modelling

Articles in Press, Accepted Manuscript
Available Online from 21 September 2026