Document Type : Original Article

Authors

• Haniyeh Sedaghat Kalmarzi ¹
• Mohammad Hassan Fotros ²

¹ Department of Economics, Razi University, Kermanshah, Iran

² Economics Department, Bu-Ali Sina University, Hamedan, Iran

Abstract

The Iranian economy is intensely affected by the size of the government and oil income. Oil incomes might influence the relationship between inflation and government size since financing the budget in Iran is based to a significant degree on oil revenues. Due to the significance of government size and oil income on the price level, the oil revenue-government size-inflation nexus in Iran during the period 1991-2021 is considered. Estimation results of a Markov switching model recommend that government size incorporates a significant positive affect on inflation. Moreover, the growth of oil income is found to have a significant negative affect on the inflation. Based on the findings, it appears that there are two regimes being considered: Regime 1, which represents a high inflation regime, and Regime 2, which represents a low inflation regime. Our findings suggest that once in the low inflation regime (Regime 2), there is a moderate chance of remaining in that state. However, if initially in the high inflation regime (Regime 1), there is a higher probability of staying in that state and a lower probability of transitioning to the low inflation regime.

Keywords

• Inflation
• Oil Revenues
• Government Size
• Markov Switching Approach

Main Subjects

• Oil and Gas Economics and Management