Volatility Spillover among Exchange Rate, Inflation and Liquidity in Iran’s Economy: A TVP-VAR-BK Approach

The present study aimed to examine the transfer, reception, and the spillover of volatility from March 1982 to September 2022, using the time-varying parameter vector autoregression model based on Barunik-Krehlik (TV-VAR-BK) with monthly frequency. The results indicated that the primary relationship among the volatility of the analyzed variables is of long-term nature, with the exchange rate emerging as the dominant factor in explaining the volatility of the examined network. In the short term, liquidity serves as the primary transmitter of volatility to inflation and the exchange rate. However, in the medium and long term, the exchange rate becomes the primary transmitter of volatility to inflation, while liquidity acts as the net receiver of currency volatility. Additionally, the long-term impact of the exchange rate is more pronounced. Failure to control currency volatility can lead to inflation turbulence by transferring volatility to liquidity, underscoring the significance of exchange rate stability in managing liquidity and inflation.