Price Change Transmission Mechanism from Producer Price Index to Consumer Price Index in Iran (1990-2005)

Using Vector Autoregressive (VAR) method, Tthis paper looks forstudies the price change transmission mechanism from producer price index to consumer price index using Vector Autoregressive (VAR) model. possible relationship between Producer, Wholesale and Consumer Price indices and inflation transmission between them. We use the monthly data on the PPI, WPI, and CPI for the period 1990:4 to 2005:3 The rTo this end, 192 monthly data (from 1990:4 to 2005:3) of the three indices were gathered and analyzed. Results from impulse response function suggest that a positive shock in PPI makes the WPI and CPI to rise immediately and it lasts for more than 12 months. Moreover, a positive shock in WPI makes CPI to rise but in less than 6 months it becomes statistically insignificant in less than 6 months. Moreover, the vVariance decomposition of CPI suggests that PPI is the most influential explanatory factor in CPI changes, and also WPI is important to it, and The variance decomposition of WPI also suggests that PPI is a significant explanatory to itfactor in WPI changes.