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Investigating the Nonlinear Effect of Interest Rates on the General Level of Prices, Smooth Transition Regression Approach

Abbas Khodabakhshi (), Beitollah Akbarimoghadam () and Bijan Bidabad ()
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Abbas Khodabakhshi: PHD student, Islamic Azad University,Ghazvin Branch
Beitollah Akbarimoghadam: Associate Professor, Islamic Azad University, Ghazvin Branch

Quarterly Journal of Applied Theories of Economics, 2021, vol. 8, issue 2, 267-294

Abstract: The relationship between nominal interest rates and inflation is one of the most important issues in macroeconomic issues. Knowing this relationship and knowing the direction of this relationship will have many benefits for all economic and monetary policymakers. In this study, by expanding the theory of quantity of money, we examine the relationship between nominal interest rates and inflation rates and test this relationship using the gentle transition regression approach during 1352-96. The results show that as interest rates rise (especially when the interest rate exceeds its threshold), its impact on inflation increases. Also, the effect of interest rates on the general level of prices does not have a severe effect and changes in parameters are slow. Therefore, it can be concluded that interest rate instruments cannot be used to control high inflation and the use of policies that reduce the speed of money circulation can be more effective in controlling the general level of prices. This result shows in general terms that in the long run, interest rate income that enters the economy from payment to the factors of production is practically compensated and eliminated by reducing the purchasing power of money due to the increase in the general level of prices in society. Perhaps this can be considered as one of the wisdoms that God Almighty has said in the Holy Qur'an about the sanctity of usury: "God forbid usury" means that God eliminates usury; cited.

Keywords: Interest rates; general price levels; smooth transfer regression; money quantity theory; and Fisher theory (search for similar items in EconPapers)
JEL-codes: E31 E40 E43 (search for similar items in EconPapers)
Date: 2021
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