Investigating the Time-Frequency Spillover between Exchange Rate, Inflation and Government Budget Deficit Volatilities in Iran's Economy

Document Type : Research Paper

Authors

1 Faculty of Economics and Administrative Sciences, Ferdowsi University of Mashhad, Mashhad, Iran.

2 Department of Economics, Faculty of Management and Economics, Tarbiat Modares University, Tehran, Iran.

3 Department of Theoretical Economics, Faculty of Economic and Administrative Sciences, University of Mazandaran, Babolsar, Iran.

Abstract

In the present study, the transferring and receiving, as well as the causal relationship of volatilities transmission according to the time-frequency across exchange rate, inflation, and budget deficit in the period of 2006:03-2019:02 (1385:01-1397:12) with a Monthly basis, is investigated using time-varying parameters vector autoregression model in different time-frequencies. The results showed that the main factor in the formation of volatilities in the government budget deficit as well as inflation is the exchange rate, especially if the exchange rate volatilities are long-term, the transmission of volatilities, and the net effect of the exchange rate on inflation and budget deficit increases. In addition, if exchange rate volatilities continue and lead to inflation and volatilities of government budget deficit, in the medium term, budget deficit volatilities will create the basis for transferring volatilities to the exchange rate, and with the increase of exchange rate volatilities, inflation will be volatile in the long term intensively. Therefore, the control of exchange rate volatilities in the short term will prevent the increase of inflation and the government budget deficits volatilities, and if the policymaker does not consider this important, in the medium term, the exchange rate will volatile again through the channel of the government budget deficit, and subsequently, the volatilities will be transferred to inflation in the long run severely.

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References

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Journal of Economic Research (Tahghighat- E- Eghtesadi)
Volume 59, Issue 2 - Serial Number 147
November 2024
Pages 231-252

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History

  • Receive Date: 27 August 2023
  • Revise Date: 24 February 2024
  • Accept Date: 12 November 2024

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