The Relationship between Government Budget Deficit and Trade Balance in Iran within a Dynamic Structural Macro-Econometric Model

In this study، to find the relationship between the government budget deficit and trade balance in Iran، a structural macro-econometric model is set up. In the model، government consumption expenditure increased by 20 percent annually during 2001-2010، so the government budget deficit increased relative to the baseline. The financing methods of budget deficit and relevant effects on trade balance were analyzed in 4 options. The results indicate that government budget deficit increases by adopting expansionary fiscal policy in all options. If the budget deficit is financed by borrowing from the central bank (the first option)، it will raise the monetary base and finally worsen the trade balance and non-oil trade balance compared to the baseline. If the budget deficit is financed by selling participation bonds to the public (the second option)، it will reduce aggregate demand and finally improve the trade balance and non-oil trade balance compared to the baseline. If direct taxes and government spending are increased by the same amount (the third option)، private consumption will decrease; and trade balance and non-oil trade balance will be deteriorated compared to the baseline. Finally، if the budget deficit is financed by the withdrawal of foreign currency reserves (the fourth option)، oil revenues will increase، as a result the trade balance will be improved and the non-oil trade balance will be exacerbated compared to the baseline.