The Impact of Government Debt to Central Bank on Economic Growth in Iran: Smooth Transition Regression (STR) Approach

Financial crises, along with the negative and destructive effects of the debt stocks on the economy of countries with the national debt, have caused the "economic effects of the public debt stocks problem," and has become a controversial issue in the public sector economics literature. Using a Smooth Transition Regression (STR) model, this paper investigates the asymmetric impact of the size of government debt - the ratio of government debt to the central bank to GDP - on economic growth in Iran during 1973-2017. The findings showed that the size of government debt to the central bank in a two-regime structure, with two thresholds, affected economic growth by 4.40% and 28.98%. At low levels of debt (years that the size of government debt to central bank is less than 4.4%) and high levels of debt (years that the size of government debt to central bank is greater than 4.40% and less than 28.98%), government borrowing from the central bank has had a negative and positive effect on economic growth, respectively.  Finally, contrary to the expectations, during the period 1980-1991 (years that the size of government debt to the central bank is greater than 28.98%), the amount of government debt to the central bank has positively affected economic growth. This positive impact can be due to the specific features of the revolution and war periods in Iran, such as reducing crowding-out effects, the significant gap between real and potential production, and the more efficient cost management during years.