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Credit Expansion and Inflation in Iran: An Unrestricted Error Correction Model

Author

Listed:
  • Karim Eslamloueyan

    (Associate Professor of Economics, Department of Economics, Shiraz University)

  • Ali Darvishi

    (Research Department, Management and Planning Organization)

Abstract

This paper pursues two goals. First, it uses an unrestricted error correction model and the bounds testing approach proposed by Pesaran, Shin, and Smith (2001) to study the short- and long-run effects of bank credit on inflation in Iran, a country with some history of interest-free banking system. Second, this paper examines how institutional and cultural changes resulted from bank nationalization and the implementations of interest-free banking have affected price level movement in Iran. The approach used in this paper is capable of testing the existence of long run relations regardless of whether the underlying variables are stationary, integrated, or mutually cointegrated. The result indicates that there exists a long-run relationship between inflation and its main determinants, namely, bank credit, import price, real GNP, and black market exchange rate. However, bank credit has no short-run effect on price level movement in Iran. Furthermore, the paper shows that the nationalization of banks and the implementation of interest-free banking system in Iran have caused a structural change in the behavior of inflation.

Suggested Citation

  • Karim Eslamloueyan & Ali Darvishi, 2007. "Credit Expansion and Inflation in Iran: An Unrestricted Error Correction Model," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 12(2), pages 105-126, spring.
    • Handle: RePEc:eut:journl:v:12:y:2007:i:2:p:105
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    References listed on IDEAS

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    1. Bardsen, Gunnar, 1989. "Estimation of Long Run Coefficients in Error Correction Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(3), pages 345-350, August.
    2. Dhakal, Dharmendra & Kandil, Magda & Sharma, Subhash C. & Trescott, Paul B., 1994. "Determinants of the inflation rate in the United States: A VAR investigation," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(1), pages 95-112.
    3. Hondroyiannis, George & Papapetrou, Evangelia, 1998. "Temporal causality and the inflation-productivity relationship: Evidence from eight low inflation OECD countries," International Review of Economics & Finance, Elsevier, vol. 7(1), pages 117-135.
    4. Blinder, Alan S, 1987. "Credit Rationing and Effective Supply Failures," Economic Journal, Royal Economic Society, vol. 97(386), pages 327-352, June.
    5. Mr. Mangal Goswami & Oya Celasun, 2002. "An Analysis of Money Demand and Inflation in the Islamic Republic of Iran," IMF Working Papers 2002/205, International Monetary Fund.
    6. Tim Hampton, 2001. "How much do import price shocks matter for consumer prices?," Reserve Bank of New Zealand Discussion Paper Series DP2001/06, Reserve Bank of New Zealand.
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    Citations

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    Cited by:

    1. Pinshi, Christian, 2020. "Rethinking error correction model in macroeconometric analysis : A relevant review," MPRA Paper 98202, University Library of Munich, Germany.
    2. Serhat Yuksel & Mustafa Ozsari, 2016. "Impact of Consumer Loans on Inflation and Current Account Deficit: A Toda Yamamoto Causality Test for Turkey," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 2(2), pages 3-14, December.
    3. Christian P Pinshi, 2021. "Repenser le modèle à correction d'erreurs dans l'analyse macroéconométrique : Une revue," Working Papers hal-03168443, HAL.

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