Evaluating the Role of Monetary Factors in Iran's Inflation: A NARDL Approach with Emphasis on Structural Breaks

Assessing the factors that amplify inflation in the economy of any country is essential from multiple perspectives, as inflation not only has economic implications but also social and political effects. Accordingly, the present study examines the impact of various factors, including interest rates, money supply, budget deficits, and government debt to banks, on Iran’s inflation rate using the NARDL econometric approach over the period 1993–2022. The long-term results indicate that a positive shock to money supply has a positive effect on the inflation rate. A positive shock to the budget deficit also exerts a positive impact on inflation, meaning it increases inflation in Iran. Conversely, a positive shock to the interest rate shows an inverse effect on inflation, such that an increase in interest rates leads to a reduction in inflation. Finally, a positive shock to government debt to banks has a positive effect on inflation. Based on these findings and the variables studied, it is recommended that budget deficits be financed through channels other than borrowing from the central bank, to break the link between budget deficits, money supply, and inflation. Additionally, reducing the nominal interest rate on bank loans could help lower production costs and, ultimately, control inflation through reduced cost pressures.