Study on the Impacts of Exchange Rate Shocks and Gap of GDP on Inflation in Iran

Study of price trend in Iran, showed that general level of prices is rising continually during time. An inflation situation has effect on most economic variables. Therefore investigation of effective factors and variables on inflation is important. Exchange rate and Gap in product are factors which affect inflation. In this paper the impact of exchange rate shocks and GAP on inflation in Iran’s economy with use of Hoderik Prescott filter and Kalman filter for analyzing exchange rate shocks and GAP during the time 1998:1-2007:4 in Johanson Cointegration test and VECM Model has studied. Main results indicated that, positive exchange rate shock has a negative effect and negative exchange rate shocks has a positive effect on inflation in the long run and sustainability in inflation in long run is less depended to exchange rate rather than short run. Also the Gap in gross domestic product and liquidity has a positive effect on inflation. So taking suitable exchange rate policy could be one way for controlling inflation.