Determinants of Inflation in the Islamic Republic of Iran: A Macroeconomic Analysis

29 Pages Posted: 2 Feb 2006

See all articles by Olin Liu

Olin Liu

International Monetary Fund (IMF)

Olumuyiwa Adedeji

International Monetary Fund (IMF)

Date Written: July 2000

Abstract

This study establishes a framework for analyzing the major determinants of inflation in the Islamic Republic of Iran. An empirical model was estimated by taking into consideration disequilibria in the markets for money, foreign exchange, and goods. Results strongly support the need for a sustained prudent monetary policy in order to reduce inflation and stabilize the foreign exchange market. The estimation shows that an excess money supply generates an increase in the rate of inflation that, in turn, intensifies asset substitution (from money to foreign exchange), thereby weakening real demand for money and exerting pressures on the foreign exchange market. The study also found that a permanent rise in real income tends to increase the real demand for money and reduces inflation in the long run.

Keywords: Iran money demand, exchange rate, output gap, inflation and cointegration

JEL Classification: E31, E41, O53

Suggested Citation

Liu, Olin and Adedeji, Olumuyiwa, Determinants of Inflation in the Islamic Republic of Iran: A Macroeconomic Analysis (July 2000). IMF Working Paper No. 00/127. Available at SSRN: https://ssrn.com/abstract=879891

Olin Liu (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Olumuyiwa Adedeji

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
346
Abstract Views
1,179
rank
86,848
PlumX Metrics