The Long Run Relationship between Government Revenue and Expenditure in Iran: A Co integration Analysis in the Presence of Structural Breaks

The relationship between government revenue and government expenditure has been an important topic in public economics, given its relevance for policy especially with respect to the budget deficit. The main purpose of this paper is to examine the relationship between government revenue and expenditure in Iran using annual time series data spanning from 1978 to 2011. The Iranian economy has been subject to a multitude of structural changes and regime shifts during the sample period. Thus, time series properties of the data are first analysed by Zivot-Andrews (1992) model. The empirical results based on this model indicate that there is not enough evidence against the null hypothesis of unit roots for all of the variables under investigation. Taking into account the resulting endogenously determined structural breaks; the Saikkonen and Luetkephol (2000) cointegration approach is then employed to determine the long-run Relationship between Government Expenditure (GE) and Government Revenue(TR). This cointegration technique accommodates potential structural breaks that could undermine the existence of a long-run relationship between Government Expenditure and Government Revenue.