Study of the Relationship Between Inflation and Economic Growth and Government Spending Using the Soft Transition Regression (STR) Approach

This paper aims to study the non-linear and threshold effects of the macroeconomics variables on inflation in Iran's economy using the sequential seasonal periodic data from 1991 to 2018 based on the Soft Transition Regression (STR).In the developed model, the cash growth was selected as threshold variable with the approximate sum of 6 percent (24 percent a year) as the threshold limit. The results show that the linear approximation cannot satisfactorily explain the non-linear effects of the oil incomes and other variables in different regimes. In other words, the sequential non-linear pattern, having considered the regime changes and the changing indices during time, The results show that, depending on the regime conditions, other macro variables such as current expenditures, construction expenditures and economic growth exacerbate inflation. Moreover, in high regime, the price level deviation from the long-term balanced relation, is a very significant factor in inflation acceleration, to such extent that inflation exorbitantly reacts to this gap.In different regimes the oil incomes have not had meaningful or significant effects on inflation, as it seems that the effect of this variable on inflation is controlled to a very great extent by other variables. The legislation authority, by controlling the cash growth and transferring it to the low growth regime, is able to abort or reduce the effect of many other variables such as current or construction expenditures.