IDEAS home Printed from https://ideas.repec.org/p/car/carecp/06-03.html
   My bibliography  Save this paper

Deficits, Debt Financing, Monetary Policy and Inflation in Developing Countries: Internal or External Factors? Evidence from Iran

Author

Abstract

This paper focuses on internal and external factors, which influence the inflation rate in developing countries. A monetary model of inflation rate, capable of incorporating both monetary and fiscal policies as well as other internal and external factors, was developed and tested on Iranian data. It was found that, over the long run, a higher exchange rate leads to a higher price and that the fiscal policy is very effective to fight inflation. The major factors affecting inflation in Iran, over the long run, are internal rather than external. However, over the short run, the sources of inflation are both external and internal.

Suggested Citation

  • Amir Kia, 2006. "Deficits, Debt Financing, Monetary Policy and Inflation in Developing Countries: Internal or External Factors? Evidence from Iran," Carleton Economic Papers 06-03, Carleton University, Department of Economics, revised Nov 2006.
  • Handle: RePEc:car:carecp:06-03
    as

    Download full text from publisher

    File URL: http://www.carleton.ca/economics/wp-content/uploads/cep06-03.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. McNelis, Paul D., 1987. "Indexing, exchange rate policy and inflationary feedback effects in Latin America," World Development, Elsevier, vol. 15(8), pages 1107-1117, August.
    2. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    3. 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.
    4. Robert A. Amano & Tony S. Wirjanto, 1998. "Government Expenditures and the Permanent-Income Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 719-730, July.
    5. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-1439, November.
    6. Cardia, Emanuela & Kozhaya, Norma & Ruge-Murcia, Francisco J, 2003. " Distortionary Taxation and Labor Supply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 350-373, June.
    7. Ahmed, Shaghil & Yoo, Byung Sam, 1995. "Fiscal Trends in Real Economic Aggregates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 985-1001, November.
    8. Neyapti, Bilin, 2004. "Fiscal decentralization, central bank independence and inflation: a panel investigation," Economics Letters, Elsevier, vol. 82(2), pages 227-230, February.
    9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    10. Meltzer, Allan H, 1977. "Anticipated Inflation and Unanticipated Price Change: A Test of the Price-Specie Flow Theory and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 182-205, February.
    11. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-698, August.
    12. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    13. Kim, Jinill, 2000. "Constructing and estimating a realistic optimizing model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 329-359, April.
    14. Edmund Sheehey, 1979. "On the measurement of imported inflation in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 115(1), pages 68-80, March.
    15. Ayca Tekin-Koru & Erdal Ozmen, 2003. "Budget deficits, money growth and inflation: the Turkish evidence," Applied Economics, Taylor & Francis Journals, vol. 35(5), pages 591-596.
    16. Steve Ambler & Emanuela Cardia, 1996. "Optimal Government Spending in a Business Cycle Model," Cahiers de recherche CREFE / CREFE Working Papers 44, CREFE, Université du Québec à Montréal.
    17. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    18. Karras, Georgios, 1994. "Government Spending and Private Consumption: Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 9-22, February.
    19. Ashra, Sunil & Chattopadhyay, Saumen & Chaudhuri, Kausik, 2004. "Deficit, money and price: the Indian experience," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 289-299, April.
    20. Hueng, C. James, 1999. "Money demand in an open-economy shopping-time model: an out-of-sample-prediction application to Canada," Journal of Economics and Business, Elsevier, vol. 51(6), pages 489-503.
    21. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
    22. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    23. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-328, August.
    24. Guidotti, Pablo E, 1993. "Currency Substitution and Financial Innovation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 109-124, February.
    25. Giannaros, Demetrios S. & Kolluri, Bharat R., 1985. "Deficit spending, money, and inflation: Some international empirical evidence," Journal of Macroeconomics, Elsevier, vol. 7(3), pages 401-417.
    26. Robert A. Amano & Tony S. Wirjanto, 1997. "Intratemporal Substitution And Government Spending," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 605-609, November.
    27. Bradley, Michael D., 1986. "Government spending or deficit financing: which causes crowding out?," Journal of Economics and Business, Elsevier, vol. 38(3), pages 203-214, August.
    28. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    29. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-127, March.
    30. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    31. Brunner, Karl & Meltzer, Allan H., 1978. "The problem of inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 8(1), pages 1-15, January.
    32. Grayham E. Mizon & David F. Hendry, 1998. "Exogeneity, causality, and co-breaking in economic policy analysis of a small econometric model of money in the UK," Empirical Economics, Springer, vol. 23(3), pages 267-294.
    33. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
    34. Baydur, Cem Mehmet & Suslu, Bora, 2004. "The view of Sargent and Wallace on monetary policy: tight monetary policy does not stop inflation: an evaluation of CBRT's monetary policy for 1987-2002," Journal of Policy Modeling, Elsevier, vol. 26(2), pages 191-208, February.
    35. Hakan Berument & Zubeyir Kilinc, 2004. "The effect of foreign income on economic performance of a small-open economy: evidence from Turkey," Applied Economics Letters, Taylor & Francis Journals, vol. 11(8), pages 483-488.
    36. Allan Drazen & Elhanan Helpman, 1990. "Inflationary Consequences of Anticipated Macroeconomic Policies," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 147-164.
    37. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    38. Rudiger Dornbusch & Ferico Sturzenegger & Holger Wolf, 1990. "Extreme Inflation: Dynamics and Stabilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 1-84.
    39. Lutkepohl, Helmut & Reimers, Hans-Eggert, 1992. "Impulse response analysis of cointegrated systems," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 53-78, January.
    40. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
    41. Abdelhak S. Senhadji, 2003. "External Shocks and Debt Accumulation in a Small Open Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 207-239, January.
    42. W. Michael Cox, 1983. "Government Revenue from Deficit Finance," Canadian Journal of Economics, Canadian Economics Association, vol. 16(2), pages 264-274, May.
    43. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Esfahani, Hadi Salehi & Mohaddes, Kamiar & Pesaran, M. Hashem, 2013. "Oil exports and the Iranian economy," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(3), pages 221-237.
    2. Khani Hoolari, Seyed Morteza & Abounoori, Abbas Ali & Mohammadi, Teymour, 2014. "The Effect of Governance and Political Instability Determinants on Inflation in Iran," MPRA Paper 55827, University Library of Munich, Germany, revised Mar 2014.
    3. repec:kap:openec:v:28:y:2017:i:5:d:10.1007_s11079-017-9467-7 is not listed on IDEAS
    4. International Monetary Fund, 2008. "Islamic Republic of Iran; Selected Issues," IMF Staff Country Reports 08/285, International Monetary Fund.

    More about this item

    Keywords

    Demand for money; inflation; fiscal and monetary policies; external and internal factors;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:car:carecp:06-03. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sabrina Robineau). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.