Temporary and permanent income shocks are the most important determinants of household’s consumption. According to Friedman's permanent income hypothesis, household consumption always responds to permanent income shock more than temporary shocks. Given that these two components shock separately are unobservable, in this paper we use Blanchard-Quah method to decompose the income shocks into temporary and permanent and then by applying Structural Vector Auto-regression model to identify the effect of that two shock components on household’s consumption in Iran during the 1974-2014 years. The results from the estimated model confirm the validity of the PIH in Iran. So that household consumption almost entirely explained by permanent shocks income. But it does not show sensitivity to temporary shocks.

The purpose of this study is to investigate the the permanent and transitory components of household income, liquidity (money) and government expenditures to identify economic shocks affected the household consumption in Iran. For this target, using the univariate stochastic detrending approach proposed by Beveridge and Nelson (BN), we decompose the time series data of these variables over the period (1974-2014) into permanent and transitory components. Using the technique of ARDL, the effects of the permanent and transitory of the shocks on households' consumption are studied. The paper results show that there is positive and significant relationship between household consumption and temporary and permanent income shocks and permanent liquidity shocks, whereas a significant and negative relationship with permanent government spending shocks in Iran. Thus, the fiscal, monetary and income government policies should be in a way that keep the permanent income of Iranian households from any destructive shock on economy.
JEL Classification: D31, D91, E21

In order to establish the sustainable budget in Iran, this paper examines the optimal level of oil exploitation in the state budget during the period leading up to the time of finishing of oil reserves. The governments usually provide a variety of services. Since the Iranian government possesses the intergenerational oil resources, the continuity of these services provision is a vital goal. The results of this study show that with the government's ongoing current policies, the government's budget will be unsustainable, the government current expenditures will account for a large part of the government's public resources, financial assets will not be accumulated, the dependence of the budget on oil revenue will be high, and the government cannot stop relying on oil revenues when oil reserves will be ended. However, by adopting approaches based on the permanent income hypothesis or moderate permanent income hypothesis, while reducing the share of the current expenditures, the government can save some of the oil revenues and create a positive non-oil initial level. In other words, with the end of the state's oil reserves, the government can safely and reliably cut dependence on oil income and finance all the expenditures from non-oil revenues. The approach to the permanent income hypothesis due to the gradual adjustment process will be faced to less tension and less resistance within the community.

Iran is one of the oil exporter countries that the major part of its income is revenue of the oil. Trade balance in Iran was fluctuating too much in the past decade. This paper investigates the major sources of changes in the trade balance of Iran with an emphasis on the difference between permanent and transitory disturbances to income. Applying Blanchard-Quah technique, we classified income shocks in two groups, permanent shocks and transitory shocks and we have investigated the impacts of these shocks on the trade balance. The findings support the hypothesis that transitory disturbances to income are the main determinants of changes in the trade balance. These results seem to be fairly consistent with inter-temporal models of trade balance, which demonstrate transitory shocks to income as the main source of variations in the trade balance. These results do not seem to support the idea that productivity shocks alone generate most of the variation in the trade balance.

Household consumption expenditures one of the main economic variables that reflect the households’ welfare level as well as stimulate aggregate demand and purpose of all production in the economy. Therefore, measuring the income shocks transmission to household consumption is critical for evaluation the ability of consumption smoothing with income shocks or economic stability and hence, for designing stabilization, income-maintenance and optimal social policies in the aim to increasing purchasing power, preserving and promoting the welfare of households. According to the terms of stagflation in Iran economy over the past few years, this paper computes the degree of transmission of temporary and permanent income shocks to using the panel data on the income, meal consumption expenditures and other household characteristics (Age, gender, education, working status and marital status) gathered by Iranian urban and rural households’ expenditures and Income Surveys (HEIS) over the period 1388-1393. The results show that there is nearly complete insurance against temporary and permanent income during the period of study.

In a rational expectation utility optimization model, the consumption profile is smoothed over time and, under some simplifying assumptions, it equals a constant fraction of total lifetime income. For this result to hold, the consumer must be able to transfer income from one period to another. Otherwise, the consumer is under liquidity constraints. The liquidity constraint affects the allocation of durable and non-durable consumption. We focus on the relationship between the marginal utility of household durable good stock and the marginal utility of non-durable consumption. When capital markets are perfect, the marginal utility of these two variables always bears an equilibrium relationship. But if liquidity constraints are binding, the difference between the lagged value of these two variables can predict the current growth change in non-durable consumption. We estimate the long-run relationship between these two variables using an error correction model and a pseudo-panel data set based on Iranian Household Expenditure and Income Surveys (HEIS). In the error correction model, the faster the error of the long-run relationship corrects, the lower the liquidity constraint. This coefficient is estimated to be statistically significant and is in [-0.22, -0.30] range in different estimates, thus we can reject the permanent-income hypothesis and accept that capital markets are not perfect in Iran.

In Iran, taxes have a very minuscule share in government budget. The situation is very upsetting and it has very harmful consequences for the Iranian economy; for example sudden decrease in the government means as a result of the oil prices slump and embargoes which lead to a downturn in public services and public welfare, government borrowing from the central bank in order to pay for the deficit and very high and constant inflations which their burden are borne by the low income social groups and many other economic ailments. The question concerns how to increase the government’s tax revenues? In this study, we have tried to look at the importance of the issues regarding tax administration and also given the asymmetric information as to the income tax, and in order to prevent tax evasion phenomenon (and to increase government’s tax revenues without extending tax bases and increasing tax rates), to introduce a certain auditing mechanism and attempt to analyze it in a theoretical and experimental manner. We have made use of game theory and field study for that end.

According to Barro–Ricardo theorem, government budget deficit has not an effect on the consumption. Inspired by the theory of life cycle and permanent income, they believe that, since the government finances the budget deficits through issuing bonds, in future government will offset it by increasing taxes. Therefore, the consumption does not change. In this paper we test this theory and get positive result by estimating the consumption function of Iran. In Iran budget deficit is usually financed by expansion of liquidity through borrowing from central bank or by selling foreign currencies and not by issuing bonds. Therefore the budget deficit in Iran will remain neutral as a result.

Inefficiency and injustice of subsidy system in Iran over the years induced the government to implement targeted subsidy law since 2010. As a result, the share of poor households receiving government subsidies decreased. Utilizing the micro-data of Households’ Income and Expenditure Surveys (HIES) from 2005 to 2014 and applying seemingly unrelated regression(SUR) technique through feasible generalized least squares (FGLS) method, this study examines the effect of targeting subsidies on households’ consumption combination. The results show that the shares of necessary goods in households’ expenditure have increased. According to Engle theory, these indicate reductions in households’ welfare. In addition, the “subsidy” dummy variable has the most effect on food expenditure share among different goods groups. One reason for the welfare reduction is higher increase in relative prices compared to increase in income due to subsidy. Since, the permanent income is of the highest effect on allocation of households’ budget among different goods groups; therefore, policy makers should focus on increase in the households’ real permanent income instead of inflationary policies, which increase nominal cash subsidies.

The oil revenue in terms of its situation in the GDP and its share in the budget and foreign exchange resources of the Iranian economy is very important. The dependence of government budget to oil revenue and its fluctuations is pointed out by many researchers as the main cause of inflation. The effect of fluctuations in oil revenues on core inflation is evaluated using VARX approach. Results show that, besides a significant positive effect of the permanent (smoothed or long-run) component, there is also a significant positive effect of cyclical component of oil revenues on core inflation. Subsequently, if the government purchases only the smoothed part of oil revenue and discard the transitory part, the core inflation could be significantly reduced.