Macroeconomic effects of current and development expenditures of the government in Iran: DSGE approach

The purpose of this study is to investigate the effects of increasing government current and development expenditures on output and inflation in the Iranian economy, taking into account the financing of each of these expenditures. To achieve this goal, a DSGE model was designed and calibrated based on seasonal data over the period 1990-2018. Examining the dynamics of the model shows that the increase in current expenditures causes inflation and decreases production, but as the share of bonds in financing these expenditures increases, the severity of its inflationary recession decreases. Moreover, increase in development expenditures generate inflation and boost production, but as the share of borrowing from central bank increases, inflationary pressures will increase and production will decrease. Overall, the results confirm that, compared to the government consumption spending, government development expenditures have lower inflationary effects, along with production growth. Also, increasing the share of bonds in financing government spending will reduce fluctuations in inflation and improve production conditions, or in other words, will lead to non-inflationary growth in the real sector of the economy