Fiscal Policy Effects on the Asset Portfolio Composition of the Central Bank of Iran

Document Type : Research Paper

Authors

1 Ph.D., Department of Economic Sciences, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran.

2 Prof., Department of Economic Sciences, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran.

3 Associate Prof., Department of Economic Sciences, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran.

10.22059/frj.2025.391042.1007721

Abstract

Objective
This study aims to examine the impact of fiscal policies on the composition of the asset portfolio of the Central Bank of Iran (CBI). In particular, it investigates how fiscal policy instruments, including government expenditures, taxation, and transfer payments, influence the allocation of central bank assets. The study focuses on changes in the relative shares of assets such as foreign currencies, gold, government debt securities, and money demand within the CBI balance sheet. Understanding the interaction between fiscal policy decisions and the structure of central bank asset portfolios is important because central banks play a critical role in maintaining financial stability, managing foreign reserves, and supporting macroeconomic stability. Therefore, analyzing how fiscal policy adjustments affect asset allocation decisions may provide useful insights for improving macroeconomic policy coordination and central bank asset management strategies.
 
Methods
This study uses annual macroeconomic data for Iran covering the period 1971–2023. To analyze the relationship between fiscal policies and the optimal allocation of central bank assets, an optimal control framework is developed to capture the dynamic interactions between fiscal policy variables and the composition of central bank assets. The model parameters are estimated using the Particle Swarm Optimization (PSO) algorithm, and the computational implementation is conducted in the Spyder environment. To evaluate the sensitivity of the CBI’s asset portfolio to fiscal policy changes, a sensitivity analysis is conducted for three major fiscal policy instruments, including government expenditures, taxation, and transfer payments. Different fiscal policy scenarios are simulated within the range of 0.5 to 1.5, which represent strongly contractionary to strongly expansionary fiscal policy conditions.
 
Results
The empirical results indicate that fiscal policies may have a considerable influence on the composition of the CBI’s asset portfolio. The findings suggest that expansionary fiscal policies tend to increase the share of government debt securities in the asset portfolio while reducing the proportion of highly liquid assets. In contrast, contractionary fiscal policies appear to be associated with an increase in foreign reserve holdings and a reduction in debt securities. The sensitivity analysis further suggests that increases in government expenditures are likely to raise the share of debt securities and gold in the portfolio, possibly reflecting greater financing needs and a stronger preference for safe assets. Moreover, reductions in transfer payments and contractionary fiscal measures may decrease the share of certain foreign currencies, such as the US dollar and the Chinese yuan, in the central bank’s portfolio. The results also indicate that under expansionary fiscal conditions, the demand for safe assets such as gold and relatively stable currencies such as the euro tends to increase, which may reflect precautionary adjustments in the central bank’s asset allocation.
 
Conclusion
Fiscal policies may play an important role in shaping the structure of central bank asset portfolios. Expansionary fiscal policies are likely to increase reliance on government debt securities, whereas contractionary policies may contribute to strengthening foreign reserve positions. Accordingly, effective coordination between fiscal and monetary policies could be important for maintaining financial stability and improving central bank asset management. Designing balanced fiscal policies, with attention to their potential effects on central bank balance sheets, may help limit excessive liquidity growth, reduce financial risks, and promote greater diversification in the central bank’s asset portfolio.

Keywords

Main Subjects

References

 
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Financial Research Journal
Volume 28, Issue 2
2026
Pages 400-423

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