Asymmetric Effects of Exchange Rate on Inflation Expectations in Iran's Inflation Targeting Economy

Exchange rate pass-through (ERPT) and its implications for the various aspects of macroeconomic and price stability are longstanding and much debated issues. In this debate, an underappreciated and unexplored issue is whether inflation expectations act as a channel for the ERPT under an inflation targeting regime. In this study are analyzed the implications of ERPT and other determinants of inflation for inflation expectations. As an empirical framework of analysis and to draw some inferences and conclusions, the Non-linear Autoregressive Distributed Lag (NARDL) model has been used during the period of April 2020 to April 2023. The results show that exchange rate depreciation increases expected price levels, while exchange rate appreciation reduces them. Inflation itself has very significant impact on inflation expectations, which implies that periods of price stability can help to anchor and moor inflation expectations. The other determinants of inflation expectations, including money supply and budget deficit also show considerable impact.