Uncertainty of government's current expenditures and development expenditures and private investment: evidence from Iran

Abstract

This study investigates the effect of uncertainty of government’s current expenditures and development expenditures on private sector investment in Iran during 1959 to 2010. Inflation rate and GDP are considered as explanatory variables in this study. Co-integration and vector error-correction models are used to obtain the estimates of the co-integrating relations and the long-run dynamics, respectively. The uncertainty measure generated from generalised autoregressive conditional heteroscedastic [EGARCH (0, 1)’ process. The results show that both uncertainty of government’s current expenditures and development expenditures have significant negative effect on private investment in the long run while in the short run, uncertainty of current government expenditures has no significant effect on private sector investment but uncertainty of development government expenditures causes private investment to increase. The effect of inflation and GDP are negative and positive respectively both in the long run and in the short run.