Core Inflation and its Effect on the Private Investmentin Iran

The aim of this paper is twofold, one of them is to measure the permanent (core) and temporary components of inflation in the context of the Iranian economy during the period 1961–2006. The other is to estimate the impact of each component of inflation on the private investment in short-run and long-run. To do so, first we use kalman filter method to decompose the actual inflation in to permanent and temporary inflation, then an ARDL model employed to estimate the effect of permanent and temporary inflation on private investment. The results show that the temporary inflation negatively influences the investment in short-run, but in the long-run it has no effect. Also these results indicat that an increasing the core inflation in long-run reduces the private investment, but in the short-run it has no effect. Therefor,the monetory and fiscal policies which are designed to adjust the inflation must be used in such manner that control the inflation but not negativly affect the economic performanc.