The Fiscal Dominance through Banking System: A Case Study on the Relationship between Government and Banking System in Iran’s Economy

Taiebnia, Ali; Mehrara, Mohsen; Pourmohammad Gelsefidi, Seyed Hamid

doi:10.22059/ier.2020.77651

The Fiscal Dominance through Banking System: A Case Study on the Relationship between Government and Banking System in Iran’s Economy

Authors

Ali Taiebnia ¹

Mohsen Mehrara ¹

Seyed Hamid Pourmohammad Gelsefidi ²

¹ Faculty of Economics, University of Tehran, Tehran, Iran.

² Department of Economics, Kish International Campus, University of Tehran, Kish, Iran.

10.22059/ier.2020.77651

Abstract

Iran's economy still has a two-digit inflation rate with high fluctuations, mainly caused by fiscal dominance. According to the relevant literature, borrowing from the central bank is the most critical fiscal dominance mechanism. After prohibiting direct borrowing from the Central Bank of Iran's government, the budget deficits are partially addressed by off-budgeting operations achieved by the banking system. In addition to introducing the Off-budgeting mechanism of fiscal dominance through the banking system, this study aimed to detect whether fiscal dominance in Iran resulted from the government's borrowing from the banks and, consequently, its indirect borrowing from the Central Bank. The bank ledgers data from March 2007 to June 2018 was used in this study, and it was revealed that an increase in the government's debts to the banks had a significant positive effect on the bank's debt to the Central Bank; the result is more highlighted in specialized and privatized banks, respectively. This finding is robust when the banks' balance sheet, banking health, and macroeconomic status have controlled.

Keywords

Budget Deficit

Off-budget Operations

Banking System

Fiscal Dominance

Money Supply

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