Investigation the Pass-Through of Global Food Prices to Domestic Prices in Iran

This paper investigates whether global food price shocks have been affected consumer price index in Iran. For this purpose, we estimate the pass-through of global food price inflation to domestic consumer price index using Markov Switching Vector Auto-Regressive (MS-VAR) and Vector Auto-Regressive (VAR) models and quarterly data from 1990:2 to 2015:1. With respect to the linearity test results, the MS-VAR model has better fit to data than linear VAR model. According to the information criteria statistics, the MSIAH(2)-VAR(1) specification is the chosen kind of MS-VAR model. The results show that the magnitude of global food prices pass-through to the consumer price index in the first and second regime is 0.05 and 0.35 after a year, respectively. Pass-through effect increases in second year that higher in second regime than first regime. The pass-through magnitude in first and second regime is 0.12 and 0.85 after two years, respectively. Because of substantial amount of agricultural inputs and food imports, the Iranian policymakers can limit the pass-through of global prices to domestic prices by applying the inflation targeting policies.