Document Type : Original Article
Authors
1
PhD Student in Economics, Department of Economics, Aligudarz Branch, Islamic Azad University, Aligudarz, Iran
2
Associate Professor, Department of Economics, Faculty of Humanities, Ayatollah al-Uzma Borujerdi University, Borujerd, Iran
3
Professor, Faculty of Economics, University of Tehran, Tehran, Iran
4
Professor, Department of Social Planning, University of Tehran, Tehran, Iran
Abstract
This paper examines central bank interventions in the context of government debt sustainability, focusing on the inflation targeting model. Using quarterly data from 1989 to 2023 for Iran and countries with inflation targeting policies, this study examined the impact of central bank interventions on government debt sustainability in the context of inflation targeting using the Markov regime shift and policy evaluation (PSM) approach. The results of the Markov model showed that monetary interventions, such as increasing liquidity, reduce debt sustainability (debt-to-GDP ratio) and weaken the relationship between government spending and revenues. Gross domestic product had a positive effect (0.61 in the high-volatility regime and 0.98 in the low-volatility regime), and central bank independence (0.96 and 0.54), exchange rate (0.48 and 0.54), oil revenues (0.43 and 0.66), and tax revenues (0.78 and 0.67) had a negative effect on debt. Liquidity (0.53 and 0.65) and inflation (0.67 and 0.54) had positive effects, with a stronger effect in the low-volatility regime. The transition probability matrix also showed that the high-volatility regime (persistence probability 0.98) was more stable than the low-volatility regime (0.91), with an average of 3 quarters of high volatility and 1 quarter of low volatility. The PSM method with the logistic model confirmed that variables such as GDP, inflation, and central bank independence affect the probability of intervention, but interventions reduce debt sustainability.
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