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The Impact of Exchange Rate Misalignment on the Persistence of Inflation in Iran

Author

Listed:
  • Masoumi , Esmat

    (University of Mazandaran)

  • Tehranchian , Amir Mansor

    (University of Mazandaran)

Abstract

The purpose of this study is to investigate the impact of exchange rate misalignment on inflation persistence. For this purpose, Vector Auto Regression method and Markov Switching model is used for quarterly data during 1989:4 -2014:3. The results show that, the impact of liquidity growth and exchange rate misalignment on inflation persistence is positive. On the other hand, GDP growth has a negative effect on inflation persistence. By Markov Switching model the nonlinear relationship between variables was investigated; based on Markov Switching model, quarterly inflationary environment (inflation regime) were extracted for economy of Iran, and the results show three different regimes for quarterly inflation. Markov model findings are consistent with VAR model findings. Results also show that, the impact of exchange rate misalignment on stable inflation regime is positive and the impact of exchange rate misalignment on unstable inflation regime is negative.

Suggested Citation

  • Masoumi , Esmat & Tehranchian , Amir Mansor, 2015. "The Impact of Exchange Rate Misalignment on the Persistence of Inflation in Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 10(2), pages 45-69, January.
    • Handle: RePEc:mbr:jmonec:v:10:y:2015:i:2:p:45-69
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation persistence; Exchange rate misalignment; Economy of Iran; Vector Auto Regressive model; Markov Switching model;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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