Is Inflation a Monetary Phenomenon? (Case of Iran)

Inflation has been the focus of numerous studies in the recent decades, both for developing and under developing countries. Although there is a general understanding about the consequences of inflation, its causes and cures are still controversial issues amongst economists. This study considers much empirical evidence and indicates the shortcomings of the other studies. We have used data from 1960 to 2001. Three econometric methods, such as Engle& Granger, Auto Regressive Distributed Lag (ARDL)، and Johanson - Joselious co integration test - have been used to examine the long run relationship between inflation rate and monetary policies. Our results indicate that a 10 percent increase in the monetary growth leads to a 3 percent increase in inflation rate. Hence the hypothesis of monetary inflation is not accepted in Iran’s economy, while out put, import price index and exchange rate are of the most important in influencing inflation rate in Iran. Our results also from VDCF and IRF methods show that money in Iran’s economy is endogenous and therefore monetary authorities do not have any control on it. Finally it was resulted that since inflationary effects of money growth certainly last in more than a period, using active monetary policies is not recommended.