The relationship between government revenue and government expenditure has been an important topic in public economics, given its relevance for policy especially with respect to the budget deficit. Besides the theoretical arguments about this relation, vast empirical literature is also available all over the world. The purpose of this paper is to investigate the relationship between government revenue and government expenditure in IRAN by using annual data and applying the Toda - Yamamoto Granger causality test for the period of 1978 to 2011. it is an important issue for this country but scare empirical literature available on this issue for IRAN.
The research uses the annual time series data which is obtained from the website of Central Bank. Data properties were analyzed to determine their stationary using unit root tests ADF and Zivot-Andrews unit root test which indicated that the series are I(1). The Toda - Yamamoto Granger causality test found unidirectional causality running from government revenue to government expenditure. So, these results consistent with the revenue-spend hypothesis. Our results support the Freidman (1978) and Buchanan-Wagner hypothesis that government revenues cause expenditure.
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