Causality Assessment among Budget Deficit, Money Supply and Inflation Rate in Iran

The main purpose of this research is study of cause and effect relationships among budget deficit, money supply and inflation rate in Iran over the years 1981-2015. For this purpose has been studied the long run and short run relationship among budget deficit, money supply and inflation rate by using vector autoregressive econometrics approach (VAR) and vector error correction model (VECM). Then in order to study causality relationship among budget deficit, money supply and inflation rate during the period under review was used granger causality test and for this purpose has been used eviews software.
The results of long run normal vector showed money amount and budget deficit have had positive and significant effect on inflation rate during the period under review. Also based on the results of granger causality test there is a direct or indirect relationship among all of the variables in the model. Based on these results, money supply causes inflation and budget deficit causes money supply and a continuous increase in budget deficit leading to more money supply and money supply leading to more inflation. On the other hand there is a two way causality relationship between budget deficit and inflation.