The Nonlinear Effects of Inflation on Iranian Economic Growth

Some studies show that inflation decreases the economic growth, while some others claim that inflation has positive effect on economic growth. Recently, several studies have examined the nonlinear effects of inflation on economic growth. This paper tries to explain the effects of inflation on Iranian economic growth based on a nonlinear model, TAR-ECM. Data are applied during 2004-2007. Our results support a nonlinear inverse-U shape effect of inflation on economic growth. The threshold level is 9 percent. This means that inflation below 9 percent can increase economic growth, but inflation above that will decrease the economic growth. Our results indicate that the central bank can peg inflation target at 9 percent level.