The Effect of Intra Industry Trade on Inflation Rate in Iran

The main purpose of this study is to investigate the effect of intra-industry trade on inflation for Iran during the period 1992-2017. Although in the framework of traditional trade theories, the effect of foreign trade on inflation is generally considered negative, studies over the topic based on new trade theories (NTT) are little and with no definite results. However, intra-industry trade seems to be able to moderate inflation through several ways, such as economies of scale and product differentiation. The results of estimate a smooth transition regression for Iran show that intra-industry trade in the form of a three-regime structure has a negative and significant negative effect on inflation. This finding is consistent with the Krugman models. Also, the results of the present study show that the effect of intra-industry trade on inflation rate has been non-linear and its presence accompanied with other factors has moderated the inflation. Based on the results, the policy recommendation of this research is to reform the structure of foreign trade in favor of intra-industry trade trade in such a way that while developing foreign trade based on comparative and competitive advantages, it is possible to adjust the inflation rate.