Document Type : ORIGINAL ARTICLE
Authors
1 Department of Economics, Faculty of Economics and Administrative Sciences, University of Sistan and Baluchestan, Zahedan, Iran
2 PhD student, Department of Economics, University of Sistan and Baluchestan, Zahedan,
Abstract
This study analyzes the roots of government fiscal instability in the Iranian economy during the period 1978-2024. Despite the extensive literature on debt sustainability, there is a significant gap in understanding the structural interaction between oil revenues, expanding social obligations, and monetary policies in shaping fiscal sustainability in a petroleum economy like Iran. To address this gap, this study uses a methodological framework that simultaneously employs two complementary econometric methods: the Vector Error Correction Model (VECM) to identify short-run and long-run equilibrium relationships, and the Dynamic Least Squares (DOLS) method to directly and robustly estimate long-run coefficients. It also uses instantaneous response functions and historical variance decomposition to analyze the dynamics of shocks. The findings of this study indicate that fiscal instability in Iran is rooted in two structural crises: 1) dependence on oil revenues that makes policies pro-cyclical and reactive, and 2) the growing social security organization liabilities that make the budget inflexible. In the long-run model, economic growth and stable oil revenues have a stabilizing effect, while liquidity growth and the level of social obligations significantly exacerbate instability. Also, regarding the monetary base, the evidence is not uniform and conclusive in all estimates; therefore, its interpretation is presented with caution. These findings indicate that fiscal sustainability in Iran, in addition to dependence on oil revenues, also depends on the way social obligations and monetary discipline are managed.
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