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Investigating the effects of financing the public sector budget deficit from the banking system: Evidence from the dynamic stochastic general equilibrium model (DSGE)
Dr Hossein Samsami Mazrae Akhoond, Mr Ahmad Bakhtiyari,
Volume 13, Issue 49 (12-2022)
Abstract
The unmanaged control of liquidity growth has always been the concern of policymakers due to its negative consequences. Recently, policymakers have focused on the needing to control the liquidity growth. One of the liquidity drivers is the government borrowing from the central bank. In this regard, governments have concerned for the issue of not borrowing from the central bank since the 2000s onwards. Although governments are limiting themselves for this borrowing, they force banks and financial institutions to borrow from that source. For this purpose, this study designs a macroeconomic model by including the net debt of the public sector to the central bank as well as to banks and financial institutions via the government's financial balance channel. This model shows the relationships of economic variables in the framework of a stochastic dynamic general equilibrium (DSGE) model, considering nominal and real frictions. The results confirm the reliability of the model for simulating the economy of Iran after determining the input values and calibrating the parameters of the model using the Iran's economy data during 2000-2020.  The findings from the research data show that the net increase in government sector debt to banks and non-banking credit institutions has a positive effect on investment, in such a way that new liquidity by the government obtained from institutions and banks It has been produced in the form of new deposits at the disposal of the department. The net impulse of public sector debt to the central bank causes an increase in consumption in the utility function and the total consumption of a combination of public goods and services provided by the government as well as private consumption goods and services. Also, the net impulse of public sector debt to the central bank causes an increase in inflation and a slight growth of production, and the net impulse of public sector debt to banks and credit institutions increases inflation and stimulates production.

The Nonlinear Effect of Inflationary Expectations and Budget Deficit on Inflation in Iran
Samaneh Omidpour, Nader Mehregan, Ali Souri,
Volume 15, Issue 55 (5-2024)
Abstract
Introduction
Inflation, as one of the structural and chronic issues of Iran's economy, has always remained at high levels and has had widespread effects on macroeconomic variables and social welfare. The persistence of high inflation leads to instability in economic, social, and political spheres, to the extent that in some cases, inflationary instability can even result in the downfall of governments. Therefore, understanding the roots of inflation can help policymakers in designing appropriate policies to control and curb it.
Numerous studies have examined the factors influencing inflation and the role of inflation expectations.The literature review revealed that, so far, no comprehensive research has been conducted on the factors affecting inflation, with an emphasis on the nonlinear relationship between inflation expectations and budget deficits within the framework of the New Keynesian approach in Iran. Additionally, the study employs the Hodrick-Prescott filter and the Kalman filter to measure inflation expectations, which is considered an innovative approach. Furthermore, relying on the New Keynesian framework, this study examines the role of the output gap, budget deficit, exchange rate, and inflation expectations in the formation of inflation, specifically identifying the asymmetric impact of inflation expectations.
Method
The aim of this study is to examine the nonlinear effects of inflation expectations and budget deficits on inflation in Iran. For this purpose, the New Keynesian approach and the Nonlinear Autoregressive Distributed Lag (NARDL) method have been used to estimate the model over the period 1988 to 2022. Inflation expectations have been calculated using two methods: the Hodrick-Prescott filter and the Kalman filter.
Results and Discussion
The research findings indicate that the estimated models based on both filters yielded very similar results, demonstrating the robustness of the study's outcomes. Additionally, the results show that variables such as the output gap, inflation expectations, budget deficit, and exchange rate influence the inflation rate. Furthermore, inflation expectations have an asymmetric effect on inflation, where their increase leads to greater persistence and stability of inflation. Moreover, inappropriate fiscal policies exacerbate inflationary pressures by intensifying the budget deficit.
Keywords:  Inflationary expectations,  budget deficit,  inflation, Iran, NARDL.
JEL: E62, E31,H62
 
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