Journal of Iranian Economic Issues

Journal of Iranian Economic Issues

Investigating the Nonlinear Impacts of Monetary and Fiscal Policies on Inflation Uncertainty in Iran

Document Type : Scientific-research

Authors
1 Associate Professor of Economics, University of Kurdistan, Sanandaj, Iran
2 M.A in Economics, University of Kurdistan, Sanandaj, Iran
3 Professor of Economics, Department of Economics, University of Sulaimani, Sulaymaniyah, Iraq
10.30465/ce.2026.51086.2013
Abstract
Inflation uncertainty is a key challenge for Iran's economy, with substantial implications for micro and macro decision-making. This study identifies the behavioral pattern of inflation uncertainty and assesses the effects of monetary and fiscal policies using a Markov Switching model over 2009:Q1–2023:Q4. The optimal model is the MSH(2)-AR(2) specification, showing that Iran's economy fluctuates between "low" and "high" inflation uncertainty regimes. The impact of policies is regime-dependent. The key finding is that in the high uncertainty regime, expansionary monetary policy (liquidity growth) has a significantly stronger exacerbating effect on price instability, while in the low uncertainty regime, this effect is significant but much weaker. In contrast, fiscal policy has no significant effect on inflation uncertainty in either regime. Additionally, exchange rate growth positively and significantly increases uncertainty, while oil revenues (especially in the early 2010s) reduce it. By providing evidence of asymmetric, regime-dependent inflation uncertainty, the findings underscore the need for a fundamental revision in the design and timing of economic policies in Iran. This implies a transition to "regime-based policymaking" with priority on controlling liquidity growth during unstable periods and re-evaluating the role of fiscal policy, enabling policymakers to better manage inflation expectations and reduce economic volatility.
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  • Receive Date 24 January 2025
  • Revise Date 10 August 2026
  • Accept Date 15 August 2026