Analyzing the Effects of the Macroeconomics Pass-through to Inflation Rate in Iran’s Economy: An Application of a Non-Linear and Asymmetric Model

The fundamental question of this study is whether the variables that generally lead to increase in the general price level of goods and services in an economy over a period of time can reduce the prices level with the same intensity and during the same time period? To answer this question, according to the stylized facts and evidence of Iran’s economy, the results of the most important studies available, and the accurate official statistics, we investigate the main economic factors affecting the inflation in Iran. In this regard, using monthly time series data of economic factors (which include the liquidity, GDP, Iran's crude oil prices, and openness) over the period from November 2008 to October 2018, an error correction model based on hidden cointegration approach, CECM (Crouching Error Correction Model), has been used to differentiate between the asymmetric behaviour of variables through decomposing the variables into positive and negative components to distinguish the accurate relationships between the variables when they increase and decrease. The results of this study, while confirming the existence of the significant asymmetric relationships between the economic factors and inflation, emphasised on the incomplete pass-through of all of the factors mentioned above into the inflation rate. Furthermore, these results have confirmed the crucial role of the liquidity and real GDP in comparison to the other research variables to control the inflation rate. The results also highlighted that the period of returning the inflation rate to its long-run equilibrium would be significantly different if the policy of increase or decrease in each of the economic factors occurs; consequently, this issue should be taken into account in inflation-targeting policies.