Planning and Budgeting

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Financial policy efficiency depends on the right proportions and composition of financial policy tools i.e. governmental revenues and expenditure as well as their flexibility and influence on economic goals. In Iran’s economy, factors like governmental budget dependence on petroleum incomes and inflexibility of government expenses have made financial policies inefficient. This, in turn, has made the budget less flexible in the face of shocks received from petroleum income changes. In the framework of correct financial policies, budget management plays a facilitating role in absorbing the shocks from governmental revenue changes in the budget and in the whole economy as a result. The paper tries to examine budgetary reactions to the shocks given to the government’s revenues, expenditures and production. To this end, the paper analyzes the impact of these shocks given to the government’s revenues (tax & non-tax), expenditures and production during the period between 1961- 1999 by means of Richardo Equality theory and Vector Auto- Regressive (VAR) and Vector Error Correction (VEC) models. In the end, referring to the results of the study, the paper offers suggestions on policy making.

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