THE EFFECT OF BUDGET DEFICIT SHOCK ON THE CURRENT ACCOUNT DEFICIT IN THE PRESENCE OF OUTPUT SHOCKS: THE TWIN DIVERGENCE PHENOMENON IN IRAN (1990:1- 2011:4)

The main purpose of this paper is study the effects of budget deficit shock on the current account deficit in the presence of output shocks in Iran's economy. Moreover, the impacts of budget deficit shock on the exchange rate, GDP shock on the budget deficit and the current account deficit are also analyzed. To achieve these goals, we have used a Vector Autoregressive Model (VAR), Impulse response functions and Variance decomposition. In estimation, we have utilized four variables as budget deficit, current account, GDP and real exchange rate. The results of effect of GDP shock on the budget deficit and current account deficit indicate a negative relation between these two deficits. In other words, the phenomenon of "twin divergence" has been verified. On the other hand, in both cases, the government revenue and the government expenditure shocks on the components of current account, the phenomenon of "twin divergence" weakly has been verified.