Comparison of Linear and Non-Linear Models in Assessing the Global Food Price Pass-Through into Domestic Food Price in Iran

Global food price crisis and its pass-through to domestic food prices has attracted especial attention from researchers and policymakers over the past decade in developing countries. In this study, by using quarterly data from 1990:Q2 to 2013:Q1, we estimate the Vector Auto-Regressive (VAR) and Markov Switching Vector Auto-Regressive (MS-VAR) models and then the impulse response functions were used to measure the extent of world food prices pass-through into domestic food prices, in Iran. According to the diagnostic statistics, MSIAH(2)-VAR(1) specification has a better fit to data than the linear VAR model. The results showed that the magnitude of the world food prices pass-through to domestic food price index in first and second regimes is respectively 0.15 and 0.40 after four quarters. Therefore, the extent of the pass-through from world food prices to domestic food price index resulting from recent world food price crisis has been higher than before. These results suggested that much more attention should be given to the magnitude of global food prices pass-through in policy designing. The policymakers can reduce the global food prices pass-through into domestic prices by adopting inflation targeting policies and appreciation of the domestic currency.