Financial System Performance and Inflation in Iran: Some Stylized Facts

The mutual relationship between financial development, as a multilateral concept, and inflation, as a key indicator of macro-economy is crucial. In this paper, inflation regimes are identified using Markov-Switching approach, and then the finance-inflation mutual relationship is investigated in post-revolution cabinets in Iran (1982-2017). Our findings suggest that there are mutual co-movements between different laterals of financial development and inflation regimes in Iran. On one hand, financial access can decrease inflation. On the other hand, inflation distorts international financial depth, financial system efficiency, and financial stability. However, it encourages some domestic financial depth laterals. Generally, the best performance of financial development to maintain inflation in the low regimes was in the 7th and 8th cabinets, and the worst performance was experienced in the 9th and 10th cabinets because of the release of the suppressed inflation accumulated due to severe financial repressions.