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Forward-looking agents and inflation in an oil-producing country: Evidence from Iran

Amir Kia and Mahboubeh Jafari

Journal of Asian Economics, 2020, vol. 69, issue C

Abstract: A monetary model of inflation was estimated on the oil-producing country of Iran for the period 1984:1–2016:4. It was found that expectations are formed rationally and that agents are forward-looking and adjust their behavior based on changes in government expenditure. Consequently, it was found that higher fiscal variables result in lower price levels over the long run. A higher oil price leads to a lower price in the country but to a higher money supply and interest rate over the long run. Furthermore, a higher domestic interest rate results in a higher price level, while the reverse is true for a higher foreign interest rate. Another cause of inflation in Iran is the foreign price level. It was found that over the short run a higher growth of the real government expenditure results in a lower inflation rate in the country but a positive change in the foreign interest rate brings in a higher inflation rate.

Keywords: Forward-looking behavior; Inflation; Oil price; Superexogeneity (search for similar items in EconPapers)
JEL-codes: E31 E41 E62 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.asieco.2020.101217

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