Investigating the Asymmetry of Exchange Rate Pass-Through to Expected Inflation in Iran Using NARDL Approach

Exchange rate changes are one of the factors affecting inflation and expected inflation that affect many economic variables in Iran. The phenomenon of exchange rate pass-through explains the relationship between changes in the value of the national currency and foreign trade relations of a country. Therefore, it is necessary to investigate the degree of exchange rate pass-through to the expected inflation in order to implement anti-inflationary economic policies. The aim of this paper is to investigate the asymmetry of exchange rate pass-through to the expected inflation in Iran using the NARDL approach based on time series data during 1990-2020. The results show that the effect of positive exchange rate shocks on expected inflation in the short and long term is negative and significant but negative exchange rate shocks have a negative and insignificant effect. Also, the effect of foreign exchange shocks on expected inflation is symmetric in the short term while the effect of foreign exchange shocks on expected inflation is asymmetric in the long run. Therefore, the central bank can implement its policies effectively by targeting inflation and focusing on the inflation expectations channel.