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Forward-looking agents and inflation in an oil-producing country: Evidence from Iran

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  • Kia, Amir
  • Jafari, Mahboubeh

Abstract

A monetary model of inflation was estimated on the oil-producing country of Iran for the period 1984:1–2016:4. It was found that expectations are formed rationally and that agents are forward-looking and adjust their behavior based on changes in government expenditure. Consequently, it was found that higher fiscal variables result in lower price levels over the long run. A higher oil price leads to a lower price in the country but to a higher money supply and interest rate over the long run. Furthermore, a higher domestic interest rate results in a higher price level, while the reverse is true for a higher foreign interest rate. Another cause of inflation in Iran is the foreign price level. It was found that over the short run a higher growth of the real government expenditure results in a lower inflation rate in the country but a positive change in the foreign interest rate brings in a higher inflation rate.

Suggested Citation

  • Kia, Amir & Jafari, Mahboubeh, 2020. "Forward-looking agents and inflation in an oil-producing country: Evidence from Iran," Journal of Asian Economics, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:asieco:v:69:y:2020:i:c:s104900782030097x
    DOI: 10.1016/j.asieco.2020.101217
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    More about this item

    Keywords

    Forward-looking behavior; Inflation; Oil price; Superexogeneity;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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