Determinants of Inflation in Iran Based on STR Approach

This Paper estimates the determinants of inflation in Iran using a linear and non- linear regression model over the period 1959-2008. In the model specification, the conventional variables (liquidity, production and exchange rate) as well as positive and negative oil revenue shocks, monetary disequilibrium, and demand gap are considered. The results show that nonlinear time series regression model outperforms the linear model in explaining inflation in Iran. The model coefficients are functions of oil price. In the low oil income regime, positive oil shocks decrease the inflation rate while these shocks are not significant in the high oil income regime. Demand gap or excess demand does not have any significant effect on inflation when oil revenues decrease. But in oil boom periods, demand gap affects inflation significantly (probably through government expenditure).