Introduction: Economic sanctions and changes in governance indicators can stimulate the supply and demand sides of the economy, which causes GDP and government revenues (government size) to fluctuate and make it unpredictable to achieve the goals set in development programs, which is one of the criteria for measuring government performance.
Research Methodology: In this study, using time series data from 1375-1402, the work of forecasting and the impact of good governance indicators and economic sanctions on government size was carried out using the Markov switching method.
Findings: The results showed that good governance indicators have a significant negative effect and economic sanctions have a significant positive effect on government size. If the governance index increases by one percent, the government size decreases by 0.3 percent, and if economic sanctions increase by one percent, the government size increases by 0.1 percent. The percentage of prediction error using the Markov method was estimated to be 2 percent. Also, in periods of recession and boom, the function of government size was examined with Markov and the results showed; the first period follows recession and the second period, boom, which is longer than the boom period, which is also consistent with economic theories; because the average life of staying in recession was calculated to be 4 years and the boom period was 6 years.
Conclusion: Economic sanctions increase economic instability and exchange rate. These effects increase government spending and budget deficit and reduce GDP. And finally, the government size increases. Also, with the improvement of governance indicators, economic stability prevails, the amount of investment increases and leads to economic growth. And as a result, the government size also decreases.