Extraction of the Seasonal Inflationary Regimes in Iranian Economy and the Effect of Government Expenditures on Inflation over the Inflationary Regimes

Government expenditures are powerful fiscal policy instruments for the government which might lead to economic growth.However, many economists and researchers believe that fiscal policy might have different effects on the economy in different economic situations, namely during the inflationary condition and business cycles. This study applies a Markov switching model to investigate the nonlinearity relationship between inflation and government expenditures using the seasonal data for Iran during the period 1990-2017.According to the Markov switching model, the seasonal inflationary environment (inflationary regimes) was extracted in Iranian economy which implies that seasonal inflation has three different regimes in Iranian economy while zero regime has low mean for inflation; first regime has medium mean for inflation and second regime has the highest inflation in Iranian economy. Then, we specified the research models and made the government's current and capital expenditures dependent on three inflationary regimes. The results indicate that the effect of government’s current and capital expenditures on inflation is negative and significant in zero and first regime, but the effect of these variables on second regime is positive and significant