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A three Gap Model was developed and estimated using time series data for the 1971-1989 period. Estimates showed a positive and significant impact of investment on of the capacity utilization rate of the Iranian economy. The model was simulated over the period of 1999-2004, taking the Third Development Plan's objectives as the target GDP growth rates, which were %5. 5 and %6 per annum in their respective order. The fiscal constraint seems to be binding GDP growth until the end of the Third Development Plan, which is not unexpected when we consider the heavy government involvement in the economy during the period from which the data were drawn. Furthermore due to heavy dependence of government revenues on oil exports, there is a possibility of some overlap between foreign exchange and fiscal constraints in the case of Iran. The fmdings also indicate that investment would need to grow by %7. 3 and %7. 2 of GDP in the two scenarios respectively in order to achieve a capacity utilization rate growth of%1 per annum.
JEL Classification: F47, F43.