There is a consensus that a sound and credible monetary policy leads to low inflation. However, the ability to control money supply is a prerequisite for success in curbing inflation. This paper emphasizes on the money supply endogeneity, and investigates the impact of the budget deficits on the liquidity using SVARX model over the period 1979-2010. Budget deficits are defined as the difference between operating deficits and net acquisition of nonfinancial assets. The results indicate that changes in the liquidity do not necessarily depend on the increasing or decreasing the budget deficits. In fact, both increasing the operating budget deficits and increasing the net acquisition of nonfinancial assets lead to increase liquidity. Furthermore, the results show that the operating deficits is the main factor of expansion net foreign assets and net claims on public sector of liquidity, and also it is the main factor of the expansion banking system claims on private sector through repression of real interest rate. Therefore, the operating deficits dominates the assets of banking system and hence liquidity. Therefore, reducing and controlling the operating budget deficits- and not necessarily the budget deficits - is a prerequisite for success in curbing money supply and inflation in Iranian economy. Fiscal reforms are associated with the ability to control the net foreign assets and net claims on public sector. Furthermore, financial liberalization decreases excess demand for credits and reduce its fluctuations.