The Interactions of Instability of Monetary and Fiscal Policies in the Iranian Economy by the MSVAR Approach

The coordination of monetary and fiscal policies, given the financial crises that have occurred in the last decade, has increased more than ever and has led countries considers coordinating economic policies to deal with the adverse effects of these crises. The implementation of any economic policy is accompanied by instabilities that can affect each other. Accordingly, the present article examines the interaction effects of monetary and fiscal policy instabilities in the Iranian economy. For this purpose, using the Markov-Switching Vector Auto Regression Model (MSVAR) during the period 1978-2017, the interaction effects of monetary and fiscal policies were investigated. The instability of the variables of tax revenues, government expenditures, interest rates and broad money was estimated using the Hadrick-Prescott filter. The results showed that government size instability in regimes of zero and one has a negative effect on interest rate instability. Interest rate volatility in regimes one and two has a significant effect on government-size instability. Also, the size instability of the government did not have a significant effect on the instability of the volume of broad money, but the instability of the broad money in the regime two had direct effects on the instability of the size of the government. The instability of tax revenues in the regime two had direct and significant effects on the instability of interest rates, while the instability of interest rates did not have a significant effect on the instability of tax revenues. Also, the instability of tax revenues in regimes of zero and one had a direct and significant effect on the instability of broad money and the instability of the broad money in the regimes two had direct and significant effects on the instability of tax revenues. Accordingly, in the Iranian economy, the instability of monetary and fiscal policies affects each other under regime conditions.