Inflation Dynamics: Inflation Persistence, structural Breaks and Changes in Iran's Inflation Persistence

Various methods have been developed to measure the persistence of inflation, which often focus on one of its two main components, i.e. the speed of convergence and the exogenous or endogenous level of the long-term equilibrium of inflation with respect to shocks. In this paper, both persistence components have been carefully evaluated. In order to measure the speed of convergence in both the first and second order moments of monthly inflation, exponential and hyperbolic speed models have been used. Also, the effect of structural break on the equilibrium level and changes in the inflation persistence coefficient have been investigated. The findings show that the occurrence of structural break in May 2017 has increased the long-term equilibrium level of monthly inflation by 1.3%. The chronicle of the time of the structural break shows its compatibility with the economic sanctions caused by unilateral withdrawal of the United States from the JCPOA and shows the role of political uncertainties in creating inflationary uncertainty. Also, the inflation persistence has increased in both the first and second order conditional moments, and the inflation persistence coefficient has increased by 8% after structural break. In such a situation, potential inflationary shocks, such as an increase in the exchange rate, spill over into expected inflation and actual inflation. As a result, the Dealing with inflation requires active and aggressive monetary policy in order to reduce the de-anchoring of inflationary expectations. Therefore, overcoming the inflation uncertainty and increasing the coefficient of inflation persistence, in addition to appropriate monetary policy, requires reducing the role of environmental variables such as severe political tensions in the country.