Designing the Financial Price Puzzle Regarding the Response of Inflation to Government Spending Shocks

Hossein Samanpour, Mehrzad Ebrahimi and Hashem Zare
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Hossein Samanpour: Department of Economics, Shiraz Branch, Islamic Azad University, Shiraz, Iran
Mehrzad Ebrahimi: Department of Economics, Shiraz Branch, Islamic Azad University, Shiraz, Iran
Hashem Zare: Department of Economics, Shiraz Branch, Islamic Azad University, Shiraz, Iran

Quarterly Journal of Applied Theories of Economics, 2024, vol. 11, issue 1, 69-104

Abstract: The present study deals with the design of the puzzle of financial prices regarding the response of inflation to government spending shocks. For this purpose, using the structural vector autoregression (SVAR) model, known as impulse models, uncertainty effects created by the government's current expenditures and construction expenditures and other effective indicators such as Impulses of technology, real wages, and short-term interest rates on inflation were examined. The data of the study was collected from the website of the central bank, and the model is estimated to have been using Eviews software for the years 1987-2020. The findings showed that an impulse from private consumption and government spending increases inflation by 2% and 1%, respectively. The response of inflation to the impetus from the technology area is also close to zero. In other words, introducing the technology variable into the financial puzzle of Iran's economy will cause a slight adjustment in inflation in the short term. The use of the technology variable will disturb the reactions of inflation and consumption to some extent. Still, on the other hand, the use of the technology variable will cause the government's expenses to increase. The response of inflation to the increase in government spending, especially at the lower limit, is an increase. Inflation's response to impulses from the short-term nominal interest rate is from the lower limit up to five periods and the upper limit up to two ascending periods. In the Iranian economy, officials and policymakers do not increase the nominal interest rate in response to the increase in inflation. This factor leads to a decrease in real interest and reduces private economic activity as well as real wages. In general, by looking at the results of the design of the puzzle of financial prices regarding the response of inflation to government spending shocks, it can be seen that in most periods, the response of inflation to government spending shocks is incremental.

Keywords: financial price puzzle; inflation; government spending; structural vector auto regression (search for similar items in EconPapers)
JEL-codes: C24 E52 G12 G32 (search for similar items in EconPapers)
Date: 2024
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