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

Authors

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

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

Abstract

ran's economy still has a two-digit inflation rate with high fluctuations, which is mainly caused by fiscal dominance. According to the relevant literature, the most important fiscal dominance mechanism is borrowing from the central bank. After prohibiting direct borrowing from the Central Bank by Iran's government, the budget deficits are partially addressed by off-budgeting operations, achieved from 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 was the result of 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 banks’ debt to the Central Bank; the effect is more highlighted in specialized and privatized banks, respectively. This finding is robust when the banks’ balance sheet status, banking health status, and macroeconomic status have controlled.
 

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