Comparative analysis of financing the government budget deficit through Islamic treasury bills and borrowing from the central bank

The budget deficit refers to the situation where the government’s expenditures exceeding its revenues According to many schools of economics, the existence of a persistent budget deficit in an economy is a sign of that country’s economic weakness, and the government of that country must implement economic reforms to eliminate or reduce it in various ways. There are various ways to finance the budget deficit such as borrowing from the central bank, borrowing from foreigners and borrowing from the people and private sectors. The present study, considering the growing trend of using Islamic treasury bills in Iran to finance the budget deficit, has addressed the importance of the impact of issuing these bonds on economic variables compared to financing the budget deficit through borrowing from the Central Bank. For this purpose, a Dynamic Stochastic General Equilibrium (DSGE) model has been developed for the Iranian economy as an open economy Results claim in order to increase the investment, enhance the state consumptions and the deflation, while facing exchange rate momentum and monetary momentum, it would be a better choice to use the Islamic Treasury Bills. Whereas to increase the consumptions, receiving a loan from the Central Bank would be a better option in the case of momentum. Moreover, results indicate that in the case using Islamic T-Bills due to these two momenta, observing variables would be less off-balance and they would return to their early balance within a short span of time.