Analyzing the dynamics of inflation by separating the trend factor from fluctuations: Comparing the role of liquidity and exchange rate

Document Type : Research Paper

Authors

1 PhD Student of Economics, Department of Economics, Yazd University

2 Department of Economics, Yazd University

3 Assistant Professor in Economics, Department of Economics, Yazd University

10.30465/jnet.2025.49629.2154

Abstract

In Iran, the investigation of the causal link between inflation and other associated variables has held a significant place for several decades and remains a contentious issue. Extensive research in this domain has yielded diverse and sometimes contradictory results due to various factors. While it is challenging to completely eliminate such discrepancies, a more detailed focus on statistical aspects and the differentiation of analytical dimensions can help reduce these discrepancies and lead to more precise policy recommendations. This study aims to examine the causal relationships between inflation and two key variables: liquidity and exchange rates. Utilizing seasonal data from 1990:1 to 2022:4, the causal relationships between the variables were tested in both symmetric and asymmetric frameworks. The findings indicate that liquidity growth is the cause of the inflation trend, while exchange rate fluctuations are the cause of inflation volatility, which occurs solely due to positive shocks. Additionally, evidence suggests that using exchange rate anchors to control inflation trends is misleading, and this policy is only temporarily focused on addressing volatility.

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History

  • Receive Date: 04 August 2024
  • Revise Date: 12 December 2024
  • Accept Date: 05 March 2025

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