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Sources of Inflation in Iran: An application of the ARDL Approach

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  • Mosayeb PAHLAVANI

    ()

  • Mohammad RAHIMI

Abstract

This paper examines the major determinants of inflation in Iran using annual time series data (1971 to 2006) by applying the ARDL approach. Taking into account the special characteristics of Iran’s economy and by considering recent empirical studies in the context of inflation, an empirical model has been constructed which emphasizes the effects of liquidity, the exchange rate, GDP, the expected rate of inflation and imported inflation factors along with the dummy variable presenting the effect of Iran/Iraq war on Iran’s economy. The empirical results show that in the long-run, the main determinants of inflation in Iran are liquidity, the exchange rate, the rate of expected inflation and the rate of imported inflation. All these variables had significant effects on the inflation rate in the short run. Moreover the destructive eight year war with Iraq had a positive effect on the inflation rate in the Iranian economy. Finally, the error correction term (-0.3995) is found to be negative and statistically significant suggesting a quick adjustment process.

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Bibliographic Info

Article provided by Euro-American Association of Economic Development in its journal International Journal of Applied Econometrics and Quantitative Studies .

Volume (Year): 9 (2009)
Issue (Month): 1 ()
Pages:

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Handle: RePEc:eaa:ijaeqs:v:9:y2009:i:1_4

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Related research

Keywords: Inflation; Liquidity; ARDL approach; Iran’s economy;

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  1. Boschen, John F & Weise, Charles L, 2003. " What Starts Inflation: Evidence from the OECD Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 323-49, June.
  2. Friedman, Milton, 1970. "A Theoretical Framework for Monetary Analysis," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 193-238, March-Apr.
  3. M. Hashem Pesaran & Ron P. Smith, 1998. "Structural Analysis of Cointegrating VARs," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 471-505, December.
  4. Christopher Bowdler & Luca Nunziata, 2004. "A note on the determinants of inflation starts in the OECD," Economics Papers 2004-W11, Economics Group, Nuffield College, University of Oxford.
  5. Subrata Ghatak & Jalal Siddiki, 2001. "The use of the ARDL approach in estimating virtual exchange rates in India," Journal of Applied Statistics, Taylor & Francis Journals, vol. 28(5), pages 573-583.
  6. Angel J. Ubide, 1997. "Determinants of Inflation in Mozambique," IMF Working Papers 97/145, International Monetary Fund.
  7. Schwartz, Anna J, 1973. "Secular Price Change in Historical Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 243-69, Part II F.
  8. Kim, Byung-Yeon, 2001. "Determinants of Inflation in Poland: A Structural Cointegration Approach," BOFIT Discussion Papers 16/2001, Bank of Finland, Institute for Economies in Transition.
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