New Evidence of the Relationship Between Money Growth, Inflation and Economic Growth in Iran

In the literature of macroeconomics and Iranian economy, there is a significant relationship expected to be among economic growth, money supply and inflation. However, regarding the manner and the direction of the causal relationship among these economic variables, various opinions have been expressed, but there is no consensus. In recent decades, various countries in many parts of the world have implemented policies with increasing emphasis on price stability, money supply control and increasing economic growth. In Iran's economy, achieving this goal is considered as one of the most important goals of policy makers and economic planners. Currently, lack of coherence and lack of internal consistency of the government's economic policies and specifically the program of the country's economic administration from the perspective of macroeconomic variables are among the basic challenges of the country's economy.

Due to the importance of the issue, the relationships among the variables of economic growth, liquidity volume and inflation rate were investigated through the Granger causality test and with the seasonal data related to Iran's economy in the period of 2004:1-2022:1. In this research, in order to test the quantile-based Granger causality, the ADF test and the quantile autoregressive unit root test (QAR) introduced by Xiao (2004) and Galva (2009) were used.

The results show that there is a two-way Granger causality relationship between economic growth and inflation in total quantiles. It should be noted that these results are not the same in all the quantiles. In the limit quantiles as well as the quantile of [0.55, 0.6], the causality relationship is two-way, but, in the rest of the quantiles, it is one-way. For example, in the middle quantile (0.5), the causality relationship is one-way from inflation to economic growth and, in the 0.35 quantile, it is from economic growth to inflation. In general, it should be noted that the causality relationship from inflation to economic growth is established in more quantiles than the causality from economic growth to inflation. Regarding the direction of causality, the results show that, in all the quantiles, the causality from economic growth to inflation is negative, and the causality from inflation to economic growth is positive in quantiles [0.05-0.75] and negative in rest of them.Regarding the causal relationship between liquidity and economic growth, the results show that there is a one-way causal relationship between these two variables in total quantiles. This relationship is, thus, from liquidity to economic growth. However, in some quantiles such as the 0.15 or 0.25 quantiles, there is also evidence for a causal relationship from liquidity growth to economic growth. It is noteworthy that, in the initial quantiles [0.05-0.25], the sign of causality is negative in the sense that economic growth can reduce liquidity growth. However, in other quantiles, the effect of economic growth on liquidity growth is positive. Also, the effect of liquidity growth on economic growth is negative in most quantiles. This is in the sense that an increase in liquidity growth causes a decrease in economic growth.The evidence shows that, in Iran's economy, worrying about the increase in the inflation rate is not considered a significant problem in terms of creating economic growth. Regarding the causal relationship between liquidity and inflation, in all the quantiles, there is a one-way relationship between liquidity volume and inflation. Regarding the direction of causality, the results show that the effect of liquidity on inflation is asymmetrical and non-linear. The results regarding the effect of inflation on liquidity growth are generally positive. This proves the increases need for liquidity of the economy in the conditions of rising inflation.

Conclusion and Policy Implications:

 In general, in order to save the country from this challenge, an economic stability program must be formulated and implemented. Of course, people's mentality and expectations also play a fundamental role in curbing inflation. Monetary and financial reforms will lead to containment of inflation and economic crisis. The reforms that ultimately lead to the reduction of the inflation rate will be followed by an increase in economic stability and the flourishing of the economy. In this regard, it is necessary for the government and the central bank to achieve key goals such as reducing inflation and increasing the rate of economic growth in order to have a detailed and scientific plan. To achieve this goal, the amount of liquidity should be controlled and inflationary expectations should be reduced by adopting appropriate policies. It is hoped that using the successful experiences of other countries and taking advantage of the results of reliable and strong economic research will significantly decrease the inflation rate in Iran in the next few years, and the country will join the group of more than 100 countries with an inflation rate below five percent.