Modeling the Relationship between Triple Crises and the Budget Deficit: Examining Scale–Time Effects by TVP-Quantile VAR and TVPFAVAR

Objective
Sovereign debt default episodes have long been an integral part of economic history and have consistently attracted attention in the literature on financial crises, particularly in analyses of the determinants of such events. A review of past sovereign default cases across economies reveals that these episodes have often coincided with banking or currency crises; indeed, in some instances, all three crises have occurred simultaneously within the same period. This study examines the phenomenon of triple crises in Iran’s economy, providing empirical evidence on the relationship between government debt crises and currency and banking crises. It further explores the impact of these three crises—currency, banking, and sovereign debt—on the government’s budget deficit. The present research contributes to the crisis literature in several ways. First, it is the first domestic study to investigate the relationship between the triple crises and the government budget deficit. Second, it seeks to identify which type of crisis exacerbates the budget deficit at different levels of crisis intensity. Third, it aims to determine the mode and direction of causality between the triple crises and the budget deficit across varying degrees of severity. Identifying the effects and causal direction of the triple crises on the budget deficit will help enhance the government budget’s flexibility and responsiveness to changing economic conditions. In other words, establishing the causal pathway from the triple crises toward the budget deficit can serve as an early warning system for policymakers. Accordingly, the primary aim of this study is to model the relationship between the triple crises and the budget deficit across different levels of crisis intensity over time.
 
Methods
This study is applied in nature and exploratory in purpose. Data were collected through documentary and library methods. The research covers 32 years, from 1991 to 2022 (1370–1401 in the Iranian calendar). MATLAB and R software were employed for model estimation. Using the TVP-FAVAR approach, the study examines the effects of the triple crises on the budget deficit across three time horizons—short-term, medium-term, and long-term. In addition, the TVP-Quantile VAR method was applied to analyze the causal relationships between the triple crises and the budget deficit. The research variables and their measurements are as follows: budget deficit (the difference between government expenditures and revenues), sovereign debt crisis (measured by the ratio of total public debt to gross domestic product), currency crisis (measured by the exchange market pressure index), and banking crisis (measured by the money market pressure index).
 
Results
Using the estimation of the TVP-FAVAR model in MATLAB, the results of the impulse response analysis of the model’s variables on the fiscal deficit over time are presented. In TVP-FAVAR models, the shocks of explanatory variables exert a statistically significant impact on the dependent variable (in this study, the triple crises) only when the impulse response of the corresponding non-fragile variable lies below or at the equilibrium point (where the equilibrium value equals zero). The results of the TVP-FAVAR model indicate that the triple crises have collectively contributed to an increase in the fiscal deficit over time. Specifically, the sovereign debt crisis shows the strongest impact, with an average annual effect coefficient of 1.36%, followed by the banking crisis with 0.7813%, and the currency crisis with 0.049%. These findings demonstrate that, among the three crises, the sovereign debt crisis exerts the greatest influence on the government’s budget deficit.
 
Conclusion
To examine the relationship among the variables, the TVP-Quantile VAR approach was employed. The results indicate that under conditions of low uncertainty (5th percentile of uncertainty), the direction of causality runs from the triple crises toward the fiscal deficit. Under moderate uncertainty levels (50th percentile), the direction of causality flows from the sovereign debt and currency crises toward the fiscal deficit and the banking crisis. However, under high uncertainty levels (95th percentile), the direction of causality reverses, flowing from the fiscal deficit and sovereign debt crisis toward the currency and banking crises.
The TVP-FAVAR model further revealed three temporal decomposition levels: short-term, medium-term, and long-term. Subsequently, the co-movement and correlation among the triple crises were analyzed across these different time horizons. The findings suggest that as the time horizon extends toward the long term, the interdependence between the triple crises and the fiscal deficit strengthens, with this dependency and co-movement being particularly pronounced in the fluctuations of the sovereign debt crisis. Moreover, the results demonstrate a positive correlation between exchange rate fluctuations and the government budget, which intensifies over the long term. Accordingly, exchange rate volatility can influence government debt to the banking system by affecting changes in current government expenditures.