Estimating the Production Gap of Agricultural Sector and Its Impact on Inflation Rate in Rural Areas of Iran: Criticism of Lucas's Theories

Since the share of agricultural sector's employment in rural areas is more than those of services and industry sectors, identifying and explaining the relationship between production gap of agricultural sector and inflation in rural areas can contribute to the economic decisions in these areas. Therefore, this study aimed at estimating the production gap of agricultural sector and its impact on inflation rate in rural areas of Iran during 1986-2013 in neoclassical Phillips curve perspective. For this purpose, Auto Regressive Distributed Lags (ARDL) method was used. The results showed that the neutral money and rational expectations theories of Lucas were unacceptable for the rural areas of Iran. In other words, the impact of monetary policies on inflation, employment and production gap in these areas was positive in both short and long terms; in addition, the Phillips curve in these areas was significantly descending in either short or long terms, indicating a negative relationship between inflation and unemployment in the rural areas of Iran but a positive relationship between inflation and production gap in these areas. The study results indicated that the inflation in rural areas was not simply a monetary phenomenon and it was also affected by the real variable of production gap of agricultural sector. So, in addition to the monetary policies, the actual sectors should be considered in inflation control of rural areas.