Inflation in Iran: An Empirical Assessment of the Key Determinants

Abstract

Purpose: To study the key determinants of chronically high inflation in Iran.

Design/Methodology/Approach: Relying on annual data from 1978 to 2019, we employ an Auto-Regressive Distributed Lag Model (ARDL) and Error Correction Model (ECM) to study the inflationary effects of monetary and fiscal policies as well as exchange rate swings and sanctions intensification.

Findings: We find that increase in money supply, depreciation of nominal exchange rate, increase in fiscal deficit, and intensification of sanctions are among the key drivers of inflation in Iran. Their impact is profound in the long run, but in the short run only money supply and currency depreciation are significant. Also, when exploring the inflation in different components of Consumer Price Index (CPI), we find robust long- and short-run effects from money supply and exchange rate, while the effects of fiscal deficit and sanctions vary across different components.

Originality/Value: We contribute to the literature by setting apart the long- vs. short-run effects of key variables on inflation in Iran. We also employ improved measures of fiscal deficit and sanctions that are shown to be of significance in the long run. Lastly, we go beyond the aggregate index and examine the variations in different CPI components.