Monetary and Banking Research Institution
Date:10/24/2018 4:41:41 PM   |   Code : 293898
A policy paper on “Impact of Budget Deficit Financing on Inflation and Economic Growth
A policy paper on “Impact of Budget Deficit Financing on Inflation and Economic Growth"
 

According to the report of the Public Relations Department of the Monetary and Banking Research Institution, in the abstract section of this policy article formulated by Saeed Bayat and Wahhab Ghelich states: "Economic stability is one of the essential subjects of macroeconomics, which is widely associated with government policies including policy of creating and financing a deficit. Meanwhile, the state budget is one of the most important instrument to achieve higher economic growth and price stability. To achieve these goals, the government must pay particular attention to how the annual budget is allocated.

The two researchers have the main question of: whether the government can use the policy of creating a deficit in order to achieve these goals? Before answering this question, two preliminary questions should be answered: First, what are the sources of financing this deficit? Secondly, which sectors of the economy the budget deficit is spent on?

The results of the paper show that the effects of budget deficit on economic growth is directly affected by the financing method of budget deficit. When the financing is through withdrawal money from foreign exchange reserve, the effect of budget deficit on economic growth is positive and ascending over time. When the financing is through transfer of government-owned corporations, although the effect of budget deficit on economic growth is positive but it is descending. And when the most part of financing is through issuing debt securities, the effect of budget deficit on economic growth will be positive and ascending but with minor slope. Indeed, because the government has to accept a financial commitment to repay principal and interest on debt securities, it tries to increase the quality of its expenditures so that the sale of debt securities is economical. So, although the accumulation of government debt over time is increasing, the government seems to have spent the resources in a way that contributed to economic growth. Also, when the most part of financing of budget deficit is through foreign exchange reserve, there is not a significant effect of budget deficit on inflation, but when the two other methods are used, budget deficit financing increases inflation.

Authors' policy recommendation is that if government tends to decrease the share of oil income in financing budget deficit, the best alternative is to increase the share of debt securities.

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