Composition of Government Spending, Optimal Fiscal Policy, and Endogenous Growth in the Economy of Iran

This paper investigates the optimal fiscal policy, pertaining to government spending, considering different productivity of public services in production function and its impact on the optimal tax rate, the optimal rate of government spending, and optimal economic growth rate. Using the VECM model for Iranian economy over 48 years, results show while the current expenditure has a positive and significant impact on the optimal economic growth rate, capital expenditure has a negative and significant impact on the rate. In other words, since current expenditures result in an increase in consumer demand in the market, it is more productive in production function; However, such impact of current expenditures is only significant in the long-run. The findings also show that an increase in capital expenditure will increase the optimal rate of tax. Also, an increase of current expenditure ratio decreases the optimal share of current expenditure relative to capital expenditures