Inflation Dynamics in Iran and Its Asymmetric Response to Policy Shocks: A NARDL Approach

Document Type : Research Paper

Authors

1 Master of Science (M.Sc.) in Economic Development and Planning, Researcher, Center for Development Research and Foresight, Tehran, Iran

2 Associate professor, The school of management, Economics and progress engineering, Iran university of science and technology, Tehran, Iran

3 Assistant professor, The Faculty of Economics and Political science, shahid beheshti university, Tehran, Iran

Abstract

This study investigates the responsiveness of the inflation rate in the Iranian economy to policy-related variables, including the monetary base, the budget deficit, the exchange rate, and the balance of payments. It also examines the asymmetric response of inflation to positive and negative shocks in these variables, in both the short and long run.
Data covering the period 2001–2023 are collected and used in the analysis. The relationships among the variables are examined using the Nonlinear Autoregressive Distributed Lag (NARDL) model, which allows for the investigation of asymmetric effects within a dynamic framework.
The results indicate that the monetary base, budget deficit, exchange rate, and balance of payments play a significant role in explaining inflation's variations and fluctuations. Furthermore, it is found that inflation responds asymmetrically to positive and negative shocks in these variables, producing different effects in the short and long run.
Based on the findings, monetary, fiscal, exchange rate, and trade policies in the Iranian economy should be designed and implemented with asymmetric and heterogeneous effects on inflation in mind. Ignoring this asymmetry may lead to inefficiencies in policy effectiveness and in controlling inflation.

Keywords

Main Subjects

References

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