The Effect of Financing Government Expenditure on Macroeconomic Variables: A Dynamic Stochastic General Equilibrium Approach

Document Type : Original Article

Authors

1 Assistant Professor of Economics, Faculty of Economics and Administrative Sciences, University of Qom, Qom, Iran

2 Assistant Professor of Economics, Institute of Trade Studies and Research, Tehran, Iran

3 Associate Professor of Economics, Department of Economics, Mofid University, Qom, Iran

Abstract

The aim of this paper is to examine the effect of government spending financing shocks from the mechanism of printing money and issuing government bonds on macroeconomic variables. For this purpose, data from the period 1991-2023 were used. To analyze the effect of this shock, a dynamic stochastic general equilibrium model was used. Based on the results, it was determined that the inflationary effects of the shock from the monetary base disappeared faster when the government budget deficit was financed through the issuance of government bonds than when it was financed through money printing. In addition, both approaches have led to a decrease in household consumption spending due to inflationary effects and a decrease in purchasing power and have had fewer positive production effects. The findings suggest that policymakers should prioritize supply-side policies—such as enhancing production and income—over monetary or bond financing. Such an approach could improve tax revenues through economic growth while minimizing the adverse macroeconomic impacts.

Keywords

Main Subjects

References

- Ali, K., & Khalid, M. (2019). Sources to Finance Fiscal Deficit and Their Impact on Inflation, A Case Study of Pakistan. The Pakistan Development Review, 58(1), 27–43.
- Bacchiocchi, A., Bellocchi, A., & Bischi, G.I. (2023). A non-linear model of public debt with bonds and money finance. Econ Polit. https,//doi.org/10.1007/s40888-023-00310-1.
- Bayat, S., & Ghilich, V. (2019). Studying the Effects of Different Methods of Financing the Government Budget Deficit on Iranian Macroeconomic Variables. Ravand, 87-88, 17-46 (In Persian).
- Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The Financial Accelerator in a Quantitative Business Cycle Framework. Handbook of Macroeconomics, Handbook of Macroeconomics, 1, 1341–1393.
- Garín, J. (2015). Borrowing constraints, collateral fluctuations, and the labor market. Journal of Economic Dynamics and Control. 57(C), 112–130.
- Gudarzi Farahani, Y., & Arabi, S. H. (2021). The collateral constraint and its impacts on the banking performance and macroeconomic variables. The Journal of Economic Policy, 13(25), 375-405 (In Persian).
- Khiabani, N., & Amiri, H. (2012). Designing an open economy dynamic stochastic general equilibrium model to study the impact of oil shocks on macroeconomic variables. Quantitative Economics, 9 (3), 34-46 (In Persian).
- Khodadadi, F., Samsami, H., & Tavakolian, H. (2023). Evaluating the macroeconomic effects of government spending in the framework of full-reserve banking, DSGE approach. Iranian Quarterly Journal of Applied Economic Studies, 12 (45), 9-45 (In Persian).
- Kim, E., & Lee, D. (2023). The macroeconomic implications of deficit financing under present bias. Economics Letters, 230(3), 45-58.
- Kiyotaki, N., & J. H. Moore (1997). Credit Cycles. Journal of Political Economy, 105, 2, 211–48.
- Malekshahi, T., Davoodi, P., & Samsami, H. (2023). The Impact of Electronic Payment Instrument on Real Sector of Iran's Economy: A DSGE Approach. Journal of Economics and Modelling, 14(1), 35-81 (In Persian).
- Martin, P., Monnet, E., & Ragot, X. (2021). The need for monetary financing of budget deficits. Les Notes du Conseil d’analyse Économique, 65, 1–12.
- Rashidi, D., Vaez Barzani, M., Bakhshi Dastjerdi, R. (2022). Comparative analysis of government deficit financing through Islamic treasury bills and borrowing from the central bank. Quarterly Journal of Economic Research and Policy, 30 (104), 39-72 (In Persian).
- Rostamzadeh, P., & Gudarzi Farahani, Y. (2017). Replacing Government Revenue through Tax Revenues by Designing a Dynamic Stochastic General Equilibrium (DSGE) Model. Economic Research (Sustainable Growth and Development), 4(17), 121-145 (In Persian).
- Sabaté, M., Fillat, C., & Escario, R. (2021). Budget deficits and money creation, Exploring their relation before Bretton Woods, Explorations in Economic History, 72, 38-56.
- Sahari, M., Vaez Barzani, M., Bakhshi Dastjerdi, R. & Amiri, H. (2024). Effect of Taxing Interest Bank Deposit on Macroeconomic Variables in the Presence and Absence of the Capital Market: A DSGE Approach. Journal of Economics and Modelling, 14(4), 1-35 (In Persian).
- Samsami Mazrae Akhund, H., & Bakhtiari, A. (2014). Studying the effects of government deficit financing from the banking system, evidence from the dynamic stochastic general equilibrium model. Economic Modeling Research, 13(49), 112-152 (In Persian).
- Samsami, H., Ahmadlou, F., & Azimi, A. (2014). Comparing the effect of government financing through exchange rate increase and borrowing from the central bank on output and inflation. Financial Economics Theories, 5(3), 11-36 (In Persian).
- Uremadu, O.S., Innocent N. Umezurike, I.N., & Kingsley, K.O. (2024). Effects of Budget Deficit Financing on the Economy of Nigeria, AKSU Journal of Administration and Corporate Governance, 4(2), 166-180.
- Yan, Y. C., & Lyu, S. J. (2023). Can e-government reduce local governments' financial deficits? Analysis based on county-level data from China. Government Information Quarterly, 40(3), 101-124.
- Zamanian, Gh., Herati, J., & Taghizadeh, H. (2015). Studying the effect of external debts on economic growth of developing countries. Regional Economics and Development, 22(10), 191-224 (In Persian).

Files

Share

How to cite

Statistics