The Impact of Exchange Rate Misalignment on the Persistence of Inflation in Iran

Esmat Masoumi () and Amir Mansor Tehranchian ()
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Esmat Masoumi : University of Mazandaran
Amir Mansor Tehranchian : University of Mazandaran

Journal of Money and Economy, 2015, vol. 10, issue 2, 45-69

Abstract: The purpose of this study is to investigate the impact of exchange rate misalignment on inflation persistence. For this purpose, Vector Auto Regression method and Markov Switching model is used for quarterly data during 1989:4 -2014:3. The results show that, the impact of liquidity growth and exchange rate misalignment on inflation persistence is positive. On the other hand, GDP growth has a negative effect on inflation persistence. By Markov Switching model the nonlinear relationship between variables was investigated; based on Markov Switching model, quarterly inflationary environment (inflation regime) were extracted for economy of Iran, and the results show three different regimes for quarterly inflation. Markov model findings are consistent with VAR model findings. Results also show that, the impact of exchange rate misalignment on stable inflation regime is positive and the impact of exchange rate misalignment on unstable inflation regime is negative.

Keywords: Inflation persistence; Exchange rate misalignment; Economy of Iran; Vector Auto Regressive model; Markov Switching model (search for similar items in EconPapers)
JEL-codes: C22 D31 E3 F31 H5 (search for similar items in EconPapers)
Date: 2015
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