Government spending generates an inevitable pathway to inflation.

The government, along with the cost of economic stabilization, incurs distribution and allocation costs. However, increase in government spending in form of intervention, going by the neo-Classical economists could result to high inflation outcomes given the full employment assumption (Olayungbo, 2013: 238). In general, fiscal policy in many countries is faced with many problems which includes, Tax collection difficulties, institutional inadequacy, problems related to access to foreign capital, Money issuing to finance public expenditures which in turn causes inflation. Therefore, government expenditures in addition to the impact on production can have an impact on inflation (Georgantopoulos & Tsamis, 2010).

Inflation has been issue of Iran's economy during the past three decades. Statistics indicate that inflation in Iran has always been high, since inflation has significant effect on the life of individuals and other economic variables. In this context, understanding the roots of inflation can assist authorities in designing proper policies. On the other hand, government needs to spend in order to ensure stability of the economy, stimulate or enhance productivity or investment through direct public spending and investment according to the Keynesian view. Government also spends in order to redistribute income between the rich and the poor. Several theories have been advanced to explain this problem in different countries. Using a variety of instruments such as government spending, although in both theoretical and practical experiences of countries have been proven that increases in government spending causes inflation, it’s one of the significant issues in the possibility of achieving economic growth.

After several decades that most economists focus on monetary policy, by the financial global crisis in 2008, again fiscal policy as a tool of economic stabilization was considered by economists. In fact, the effects of fiscal policy on economic activity in countries with emerging markets and developing countries are not clear in the short and long term. Since the economies of developing countries compared to developed countries in the business cycles are facing with more volatility and this factor makes them more vulnerable to shocks of the financial crisis. But, appropriate fiscal policy can play an important role to palliate shocks when financial crisis is occurring (Rafiq & Zeufack, 2012). The main objective of this study is to empirically explore the present relationship between inflation and government expenditures in Iran by non-linear approach based on annual data over the period 1959-2004. The relevant regime was extracted by using STR model to investigate how the government spending impact on Inflation will be discussed.