Babak Esmaeili
Abstract
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 ...
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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 4.22 percent (17 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, is better able to explain the inflation behavior in Iran’s economy in comparison with the linear pattern and can demonstrate the dynamics effects of the macro nominal and literal variables on inflation in Iran’s economy more comprehensively.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. Gross domestic product and its hindrance have anti-inflammatory effects in most regimes.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.According to the findings, it seems that cash growth is the most important factor of regime change in the relationship between inflation and other macro variables in the economy of Iran. 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.
