Relationship between inflation, inflation uncertainty and economic growth in Iran: Markov- switching approach

Document Type : Scientific-research

Author

Assistant Professor, Department of Economics, Faculty of Economics and Management, Urmia University

Abstract

The purpose of this study is to investigate the relationship between inflation and inflation uncertainty and impacts of these variables on the real economy activities in Iran. In this context, inflation uncertainty calculated using the GARCH (1,1), model and its impacts on inflation and economic growth evaluated. Based on the results of MSIAH (2) -VAR (2) model estimation, there is a two-way Granger causality relationship between inflation and inflation uncertainty. Also, considering the positive effect of inflation on inflation uncertainty in high and low uncertainty conditions, Friedman (1977) and Ball (1992) hypothesis were confirmed. On the other hand, due to the negative effect of inflation uncertainty on inflation in low inflation conditions, Holland's (1995) hypothesis has been confirmed. The estimation of MSIAH (2) model for economic growth also showed that the impact of inflation on economic growth, regardless of the level of economic growth, is always negative and significant. Inflation uncertainty has no significant effect on economic growth and the effect of fixed capital formation growth rate on economic growth has been positive and significant only in the regime associated with high average growth. The results are largely in line with the realities of Iran's economy.

Keywords

References

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Journal of Iranian Economic Issues
Volume 6, Issue 2
August 2020
Pages 37-66

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History

  • Receive Date: 01 September 2019
  • Revise Date: 24 October 2019
  • Accept Date: 05 January 2020

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