Inflation, Inflation Uncertainty and Factors Affecting Inflation in Iran

Abstract

The major factors, affecting the inflation in Iran and relation between inflation and inflation uncertainty are studied. In this contribution, two different theoretical view points (Friedman-Ball and Cukierman-Meltzer hypotheses) are studied and finally by help of general autoregressive conditional heteroskedasticity model, a unidirectional relationship from inflation to inflation uncertainty or vise versa and the possibility of a bilateral relationship between these two variables in economics of Iran, have been analyzed for the period of 1989-2003. The results show a unidirectional relationship from inflation to inflation uncertainty for a three month period. Bilateral relationship between inflation and inflation uncertainty obtained for six and nine month periods. For the six and nine month period, this relationship is more intensive than three month period. There is no relationship between inflation and inflation uncertainty for an annual period. Effective factors on inflation rate e.g. money supply; exchange rate and gross domestic product growth are used along with inflation uncertainty in the model presented in this study. Money supply and exchange rate growth in black market have positive effects and gross domestic product growth has no effects on inflation rate in the investigated model.