The Threshold Effect of High Powered Money on Inflation: Approach of Nonlinear Smooth Transition Auto-regressive Models

One of the main macroeconomic phenomena that has affected Iran's economy for many years is inflation. In line with the importance of this phenomenon and the need to identify the factors affecting it, In the present study, the existence of non-linear relationships between inflation and other influential variables, especially the monetary base, has been examined and in fact, it has been evaluated the threshold effect of high power money on inflation. For this purpose, the Sidesrakis approach and the framework of the nonlinear smooth transition auto-regressive have been used in the period of 1354 to 1392. Among variables such as monetary base, exchange rate, capital and time preference rate and internal rate of return; monetary base was chosen as variable transition. The results showed that: A) Nonlinear Logistic Model, based on the Terasvirta test, has a better estimation than a linear models. B) Inflationary pattern follows regulations of two regimes. In the first regime, the high power money has a positive effect on inflation and is multiplied in the second regime. C) Capital, time preference rate and Internal rate of return have a negative effect on inflation in the first and second regimes; so that the negative effect of variables is reduced in the second regime.
D) The transfer speed is 0.9 and show that the speed of adjustment in the first regime is higher than the second regime.