A Study on Nonlinear Relationship between Inflation and Economic Growth in Iran A Markov Switching Approach

In the mainstream economic view, in low levels of inflation there is a positive relationship between inflation and economic growth, and this relationship changes to a negative one at high levels of inflation. This study examines the probability of occurring these two regimes, using Markov Switching Approach (MSA). The results show that there has been a positive relationship between inflation and economic growth only in 3 periods (1989-93 and two other short periods, 2002-03 and 2006), while in most of the time, inflation in Iran negatively affected the economic growth. The average duration of high inflation periods has been about 4 years, while the average duration of low inflation periods has been about 2 years.