The Impact of Volatility of Terms of Trade on Rate of Inflation in Iran

The high dependency of oil-rich countries on their respective oil revenues is de facto considered as main source of instabilities of macroeconomic variables among them. Similarly in the Iranian economy¡ the high reliance on foreign exchange earnings which have been derived from the oil exports are de jure¡ the vital determinant of instability of macroeconomic indices particularly the Terms of Trade¡ Sine qua non. In this paper¡ an attempt is made to investigate the impact of volatility in the Terms of Trade on rate of inflation in Iran for the period of 1981-2014¡ viz-a-viz utilizing the GARCH method for estimating the volatility of Terms of Trade and then applying the Fully Modified OLS Model for analyzing the effect of this fluctuation on rate of inflation¡ Ipso facto. The results prima facie¡ indicate that in the long-run the volatility of Terms of Trade had positive and significant effect on rate of inflation¡ Sui generis.