Exchange Rate Regime and Inflation in Iran

Mohsen Behzadi Soufiani
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Mohsen Behzadi Soufiani: Faculty of Economics, University of Tehran, Tehran, Iran

Financial Economics Letters, 2025, vol. 4, issue 2, 21-29

Abstract: Inflation persistence has been a case in Iranian economy and recent empirical research has shown that pass-through to prices of exchange rate fluctuations depend on the origin of the shocks behind exchange rate fluctuations. Present study investigates exchange rate pass-through into consumer prices in Iran during 1990-2023. Historical data shows both exchange rate, and CPI along with their growth are highly skewed with non-normal distributions. When dealing with outliers and non-normal distribution, quantile regression is a precise approach. Quantile regression indicates that in the lowest quantile a negligible effect of exchange rate growth on inflation and around median a stable impact is seen, while in the highest quantile the pass-through is amplified. On the other hand, sanctions, fiscal dominance and efforts toward pegging sometimes lead to overshoot in exchange rate, emerging two states. Therefore, detecting transition mechanism and complying its result with quantile regression would provide better insight. Ultimately, using Smooth Transition Regression Model (STAR), parameter break is detected which presents exchange rate growth at threshold value of 5 percent as a transition variable. When monthly exchange rate growth exceeds 5%, the economy enters a high-inflation regime and when it is below the threshold value, the economy is considered to be in a low regime with asymmetric impact which is consistent with quantile results.

Keywords: Inflation; Exchange Rate; Quantile Regression; Smooth Transition Regression (search for similar items in EconPapers)
Date: 2025
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