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The External Determinants of Inflation: The Case of Iran

Author

Listed:
  • Abdolnaser Hemmati

    (Faculty of Economics, University of Tehran, Tehran, Iran.)

  • Leili Niakan

    (Insurance Research Center, Tehran, Iran.)

  • Vida Varahrami

    (Faculty of Economics, Shahid Beheshti University, Tehran, Iran.)

Abstract

The study of determining the factors affecting inflation or consumer price index has been conducted by many macroeconomic economists nationally as well as internationally. In this paper, we assess the external determinants of inflation dynamics in Iran. For this purpose, we use an OLS single equation model and a vector error correction model (VECM). Results of the analysis reveal that money supply, exchange rate, import price index and intensification of sanctions are contributed in raising general price index in the long run. Long-run elasticity of inflation with respect to money supply, exchange rate, effective tariff and import price index are 0.25, 0.118, 0.087 and 0.71. Moreover, in every year that the severity of sanctions has increased, inflation increases with amount of 0.084 (or 8.4%).Results of OLS single equation model show that only 21% of the domestic inflation variance in short run is explained by the independent variables. Iran's inflation is driven mostly by exchange rate (with one season lag) and effective tariff (with two seasons lag). In the short run, the coefficient of error correction term is -0.13 suggesting 13 percent annual adjustment towards long run equilibrium. General Price index of last year and unit price of imported goods of two years before are found to be positively related with general price index.

Suggested Citation

  • Abdolnaser Hemmati & Leili Niakan & Vida Varahrami, 2018. "The External Determinants of Inflation: The Case of Iran," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 22(3), pages 745-756, Summer.
    • Handle: RePEc:eut:journl:v:22:y:2018:i:3:p:745
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    Citations

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    Cited by:

    1. Nyoni, Thabani, 2019. "Modeling and forecasting CPI in Iran: A univariate analysis," MPRA Paper 92454, University Library of Munich, Germany.
    2. Zarepour, Zahra & Wagner, Natascha, 2022. "Cash instead of subsidy: Assessing the impact of the iranian energy subsidy reform on households," Energy Policy, Elsevier, vol. 168(C).

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