Political Business Cycles and Fiscal-Monetary Policy in Iran

This paper examines the political business cycle hypothesis and its effects on economic development on the basis of the literature on political economics, using the annual time-series data of Iran from 1979 to 2010. Estimating the ARMA regressions of fiscal policy indicators on election dummy and control variables, the results indicate that one of the major causes of business cycles in Iran is the governments’ attempts to lower the inflation rate in election year and increase it during the first two years of the presidential term. This is found to have been attained through economic fluctuations created by means of short-term expansionary fiscal policy, mainly budgeted by oil incomes, and fiscal policy is found to be the driving force, with monetary effects being the result of accommodation of fiscal impulses.