Government Expenditure and Economic Growth in Iran

This paper examines causal relationships between Government Recurrent Expenditure (GRE) and GDP for Iran using annual data over the period 1970-2010. The Gregory-Hansen (1996) cointegration technique, allowing for the presence of potential structural breaks in data, is applied to empirically examine the long-run co-movement between these variables. The results suggest that there is a long-run relationship between these variables. The Granger Causality test indicates strong unidirectional effects from GDP to GRE. But there is no evidence that TRE promotes long-term economic growth. Moreover, the main results in this paper confirm that there is an instantaneous as well as unidirectional causal link running from GDP to GRE. Based on the results, the policy makers should ensure that recurrent expenditures are properly managed to accelerate economic growth. Moreover, government should promote efficiency in the allocation of resources by encouraging more private sector participation to ensure productivity-intensive growth.