The Impact of Economic Uncertainty Shocks and Liquidity and Credit Risks on the Sovereign Spread Index in Iran, Considering the Shadow Economy Index

The present study aimed to examine the effects of economic uncertainty shocks and liquidity and credit risks on the sovereign spread index in the Iranian economy, while taking into account the shadow economy index. In terms of purpose, this research is applied, and in terms of nature, it is descriptive–analytical and classified as an ex post facto study. The statistical population consisted of Iran’s macroeconomic data over the period 1986–2024, extracted from the World Bank database and domestic sources. To construct the composite Economic Policy Uncertainty Index, fluctuations in monetary, fiscal, and exchange-rate variables were extracted using the Hodrick–Prescott filter and subsequently combined through principal component analysis (PCA). In addition, the size of the shadow economy (Shr) was estimated using Tanzi’s currency-demand approach. A structural vector autoregression (SVAR) model was employed to analyze the dynamic relationships among the variables and estimate the empirical model. The results of the unit root tests (Phillips–Perron) and cointegration tests (Johansen–Juselius and Engle–Granger) indicated that the variables were stationary at the first-difference level and that long-run equilibrium relationships existed among them. The findings obtained from the SVAR estimation showed that shocks to economic uncertainty, credit risk, liquidity risk, inflation, the debt ratio, and the shadow economy index had positive and statistically significant effects on Iran’s sovereign spread index. Furthermore, the impulse response function (IRF) results indicated that the effects of shocks gradually dissipated toward zero in the long run, while the variance decomposition results showed that economic uncertainty and the shadow economy index accounted for the largest shares of fluctuations in the sovereign spread index. Based on these findings, controlling macroeconomic instability, improving fiscal and monetary discipline, and containing the informal sector of the economy are among the most important policy recommendations for reducing sovereign financing cost differentials.