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Analysis of domestic price and inflation determinants in Iran (as a developing oil-export based economy)

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  • Dizaji, S.F.
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    Abstract

    Abstract The objective of this study is to examine and investigate both behaviour and determinants of domestic prices and inflation rate in Iran as a developing oil export based economy. I apply two models; the first model is for investigating the main determinants of domestic prices while the second model considers the main determinants of inflation rate. The period of study is from 1973 to 2008. Some econometrics techniques such as unit root test, cointegration test, ECM model and causality test have been used. The first model is constructed according to the studies that mostly have tried to investigate the inflation in other developing and developed countries. The results indicate that foreign prices, GDP, exchange rate and the two dummy variables DT80 and DT88 ( for capturing the structural break which have been caused respectively by the war with Iraq and the subsequent reconstructions after war) have significantly affected the domestic prices in Iran. Furthermore, in the short run the main determinants of domestic prices have been foreign prices and DT88. In contrast with Aljebrin (2006) who has considered this model for other developing oil export based economies our estimations of first model demonstrate some acceptable results about the factors that have affected the domestic prices of Iran. In the second model I apply the model which has suggested by Aljebrin(2006) to investigate the inflation in developing oil based economies. The results show that money growth, oil production growth, non-oil GDP growth and two dummy variables DT80 and DT88 have affected Iranian inflation in long run. Moreover in the short run the main determinants of inflation have been non-oil GDP growth and DT88. Our results imply that the rapid development of the non-oil sector and performing some useful policies for restructuring the economy such as diversifying the economy from the oil sector will strengthen the economy and reduce the importance of oil production as a source of inflation.

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    Bibliographic Info

    Paper provided by International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague in its series ISS Working Papers - General Series with number 530.

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    Date of creation: 01 Dec 2011
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    Handle: RePEc:ems:euriss:30691

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    Keywords: Iran; developing country; domestic prices; inflation; oil exports;

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    1. Christopher Bowdler & Luca Nunziata, 2004. "A note on the determinants of inflation starts in the OECD," Economics Series Working Papers 2004-W11, University of Oxford, Department of Economics.
    2. Juncal Cunado & Fernando Pérez de Gracia, 2004. "Oil Prices, Economic Activity and Inflation: Evidence for Some Asian Countries," Faculty Working Papers 06/04, School of Economics and Business Administration, University of Navarra.
    3. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
    4. World Bank, 2008. "World Development Indicators 2008," World Bank Publications, The World Bank, number 11855, August.
    5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    6. Mangal Goswami & Oya Celasun, 2002. "An Analysis of Money Demand and Inflation in the Islamic Republic of Iran," IMF Working Papers 02/205, International Monetary Fund.
    7. James G. MacKinnon, 1992. "Approximate Asymptotic Distribution Functions for Unit Roots and Cointegration Tests," Working Papers 861, Queen's University, Department of Economics.
    8. Leo Bonato, 2007. "Money and Inflation in the Islamic Republic of Iran," IMF Working Papers 07/119, International Monetary Fund.
    9. Törbjörn I. Becker, 1999. "Common Trends and Structural Change," IMF Working Papers 99/82, International Monetary Fund.
    10. Zamani, Mehrzad, 2007. "Energy consumption and economic activities in Iran," Energy Economics, Elsevier, vol. 29(6), pages 1135-1140, November.
    11. Bahmani-Oskooee, Mohsen, 1996. "The black market exchange rate and demand for money in Iran," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 171-176.
    12. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
    13. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
    14. International Monetary Fund, 2008. "Islamic Republic of Iran," IMF Staff Country Reports 08/285, International Monetary Fund.
    15. Abbas Alavirad & Sanhita Athawale, 2005. "The impact of the budget deficit on inflation in the Islamic Republic of Iran," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 29(1), pages 37-49, 03.
    16. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
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