Time-varying Effects of Inflation Determinants: State-space Models

Based on the importance of inflation in Iran economy, paying careful attention to inflation determinants is essential. According to the results of various studies, the evaluation of inflaion determinants by using standard VAR model leads to wrong conclusions due to omitted variables bias in VAR model. The problem of price puzzle in the empirical literature is an example. In this study, for a more accurate assessment of the determinants of inflation in Iran economy and forecasting the inflation, TVP-VAR models are used to model the inflation instead of VAR model with constant coefficients. So that the variables of GDP, growth of monetary basis, inflation, exchange rates,banks interest rates and inflation uncertainty are modeled. The results represent changeable relationships between variables over time and the impact of economic conditions on the effects of variables on each other.