Effect of Central Bank Independence on Political Business Cycles in Iran: An Application of Smooth Transition Autoregressive Regression

Samadi, Ali Hussein; Jafari Samimi, Ahmad; Sadraei Javaheri, Ahmad; Ebrahimi, Mosleme

doi:10.22075/jem.2021.24731.1644

Effect of Central Bank Independence on Political Business Cycles in Iran: An Application of Smooth Transition Autoregressive Regression

Document Type : Original Article

Authors

¹ Professor in Economics, Department of Economics, Shiraz University

² Professor in Economics, Department of Economics, University of Mazandaran

³ Associate Professor in Economics, Department of Economics, Shiraz University

⁴ Ph.D. Student in Economics, Department of Economics, Shiraz University

10.22075/jem.2021.24731.1644

Abstract

The main purpose of this article is to investigate the effect of central bank independence on the establishment of Political Business Cycles (PBC) in Iran. For this purpose, the modified model of Shi and Svensson (2006) in the framework of the Smooth Transition Autoregressive Regression (STAR) during the period of 1978-2018 has been used. The results, in addition to confirming the linear relationship between the variables, showed that in the election period, for the values of PBC (ratio of budget deficit to GDP) above the threshold, central bank independence, a positive and significant effect, and for values below threshold has had a significant negative effect on PBC. Another finding of this paper is that the sum of the coefficients of central bank independence in the two regimes indicates the negative effect of increasing central bank independence on PBC. Therefore, it is suggested that, in addition to restricting the use of oil revenues, increasing the central bank's independence in the true sense of the word should be considered in order to gradually reduce PBC.

Keywords