Journal of Management and Business Solutions 3092-7226 In Press 2026 09 01 Examining the Impact of Government Expenditure Shocks and Islamic Participation Bonds on the Financial Cycle of Business Cycles during Recession and Expansion in Iran Examining the Impact of Government Expenditure Shocks and Islamic Participation Bonds on the Financial Cycle of Business Cycles during Recession and Expansion in Iran 1 17 EN Journal Article 2025 11 12 <p>The present study examines the impact of government expenditure shocks and Islamic participation bonds on the financial cycle of business cycles during periods of recession and expansion in Iran. From the perspective of research objectives, this study is applied, and in terms of its nature, it is descriptive–analytical. It falls within the category of ex post facto research and relies on historical data covering the period from 1987 to 2024. Based on the results of estimating the Markov-switching model, most coefficients are statistically significant at the 95% confidence level, and their signs are consistent with theoretical foundations. The intercept is 0.32 in the first regime and −0.58 in the second regime. According to Hamilton (1988), a regime with a negative intercept represents a recessionary regime, while a regime with a positive intercept indicates an expansionary regime. Accordingly, in this study, the first regime represents the expansion period, and the second regime represents the recession period. The variance of the disturbance terms is 0.09 in the first regime and 0.43 in the second regime. These values indicate that the first regime (the expansion period) exhibits lower volatility compared to the second regime (the recession period) in the present study. An examination of the Markov model estimation results reported in the table above shows that negative shocks to current and capital government expenditures, consumption, and inflation exert negative effects on the financial cycle in both expansionary and recessionary periods. Shocks to current and capital government expenditures in the first regime (the expansion period) lead to a reduction in the ratio of liquidity to gross domestic product, whereas in the second regime (the recession period), this effect is positive. The production variable also has a negative effect on the ratio of liquidity to gross domestic product in both regimes (recession and expansion). In Iran, due to the fact that financial markets are generally limited and imperfect, investment depends on the ability to secure financing from domestic savings. Consequently, an increase in the rate of return on bonds enhances the feasibility of financing projects.</p> https://www.journalmbs.com/index.php/jmbs/article/download/198/172