Thresholds Effect of Money Growth on Inflation in Iran

This paper surveys the effects of money growth and economic growth on inflation in Iran. We use Threshold Vector Error Correction Model (TVECM) for two sets of bivariate series inflationmoney growth and inflation-economic growth separately and estimate the parameters of TVECMs by quantitative econometric software R 3.1.0. The estimation results based on the sample of data 1990:Q1 to 2013:Q4 show the long-run equation with threshold value 0.028 for bivariate series inflation-money growth. In the short-run, money growth has no effect on the inflation rate if economy switches to the low-inflation regime (the quarterly inflation rate being less than 2.8 percent) but it has significant positive impact on inflation at high-inflation regime Estimated threshold value for bivariate series inflationeconomic growth is 0.073 and the high inflation rate above this threshold value, in contrast to low inflation rate, has positive effects on economic growth in the short-run. The obtained results support the view that inflation rate dynamics may be different when economy switch to the different inflation regime.

Threshold cointegration, Inflation; Monetary Policy; Growth, IRAN Economy