Government Size, Inflation and Economic Growth in Iran

This paper examines the causal relationship among government size, inflation and economic growth for the period (1959-2007) in Iran. The results phillips-perron unit root test indicate that the three variables mentioned above are integrated of order one. Besides, Johansen co-integration test implies the existence of long-run relationship among the variables. The VEC model has been estimated to test direction of Granger causality. The findings indicate that there is no causality relationship between government size and GDP growth. Also, the results confirm a negative unidirectional causality running from economic growth to inflation. Another result of the study shows that a decline in the government size may lead to low inflation without any pressure on economic growth. JEL codes: C32, E31, E62, H62