Analyzing the Inflation, Output Growth, and Economic Stability in Iran

In this paper, output growth and inflation were examined in Iran by using a dynamic aggregate supply and aggregate demand model during 1971-2013. For this purpose, at first the relationships among time series were evaluated. Then, the structure of the Iranian macroeconomy was used to design the structural Vector Auto-regression (VAR) models. Empirical results showed that shocks to terms of trade, monetary and fiscal policy will have positive effects on the inflationary process. Furthermore, output is mostly driven by fiscal and supply shocks. The results of variance decomposition implied that the inflationary effect of expansionary fiscal policy is far greater than increasing in output. In addition, calculated core inflation showed that the inflation in Iran has roots in demand side of the economy. Therefore, this paper recommends the demand side management policies, i.e., contractionary fiscal and monetary policies, which guarantee the output growth and decrease in inflation rate.