The Analysis of Relationship Between Inflation and Economic Growth in Iran

Economists and government authorities have been paying special attentions to the factors affecting economic growth, with it; they are going to achieve high and firm economic growth. Based on some studies, inflation and its destructive effects are known as cutting edge in this regard. So, analyzing the relationship between inflation and economic growth is an important case study which researchers tend to concentrate on. Through four sections, this paper with an emphasis on Iran's economy is going to study interrelationship between two above – mentioned variables through 45 years (1959 to 2004). The main presupposition, here, is the existence of non- linear relationship between inflation and economic growth in the mentioned period. In regard to attributes of Iran's economy, the model which has been designed here, relies on Barro, Alexander and Sarel models. We have estimated the model by econometric techniques (with and without lags). Various thresholds are considered for the inflation rate. Considering the variables in this regard, the CLS method is applied to evaluate the model. Through reduction of errors square roots, it is a criterion for picking effective inflationary threshold up. During the five years study, it shows that: 1- for low levels, there is a unilateral and causal relationship between inflation and economic growth, 2- for medium levels; the relationship between inflation and economic growth is sort of positive relationship (just up to 26 percent for a period), 3- For high levels, all inflation rates, above 26 percent, do have neutral and then negative impact on economic growth, 4- Finally, based on Gringer testing model, it is shown that there is a significant relationship from inflation to growth.