Investigating the Nonlinear Causal Relationship between Government Revenues and Expenditures in Iran: Markov Switching Nonlinear Causal Method

Panahi, Hamid Reza; Karimi Tekanloo, Zahra; Barghi Oskoie, Mohammad Mahdi

Investigating the Nonlinear Causal Relationship between Government Revenues and Expenditures in Iran: Markov Switching Nonlinear Causal Method

Document Type : Article extracted from thesis

Authors

Hamid Reza Panahi ¹

Zahra Karimi Tekanloo ²

Mohammad Mahdi Barghi Oskoie ²

¹ PhD student in Economic Sciences, Aras international campus, University of Tabriz, Tabriz, Iran

² Professor, Department of Economics, Faculty of Economics and Management, University of Tabriz, Tabriz, Iran

Abstract

Background and Objective: Examining the relationship between government expenditures and revenues is crucial for economic growth and development. Understanding the causal relationship between government income and expenditures can significantly aid in formulating an important budgetary plan to achieve economic prosperity in a country. The relationship between government income and expenditures can indicate the level of government investment in key sectors of the economy (such as education, health, and infrastructure). Increased investment in these sectors leads to long-term economic growth.
Methodology: Given the importance of investigating the relationship between government spending and revenues, this study has examined this relationship and identified the cause-and-effect relationship using the Markov Switching method. The present study has applied the Markov Switching causality method to data from the period 1973-2022.
Results and Findings: The results indicate that in a state where both government revenues and expenditures are high, causality runs from government revenues (both other revenues and oil revenues) to construction and current expenditures. In contrast, in a state of low revenue and expenditure, oil revenue only leads to a change in development costs, and other revenues lead to a change in current costs. Examining the results from the expenditure side to government revenues separately for the two investigated regimes shows that during the zero regime (high revenues and expenditures), no causality is observed from development and current costs to revenue. Conversely, when the income and expenditure situation is low, only development costs can lead to a change in other revenues, and no causality is observed from current costs to government revenues.

Keywords

Budget deficit

current expenditure

development expenditure

tax revenue

nonlinear causal relationship

Subjects

Urban & Regional Economic

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