Exchange Rate and Inflation in Iran: Cause or Consequence

Articles in Press

Document Type : Research Paper

Authors

Faculty of Economics , University of Tehran, Tehran, Iran.

10.22059/ier.2025.400115.1008285

Abstract

The present study addresses a contentious issue within the theoretical and empirical discourse on exchange rate and inflation. While the monetary theory posits that the long-term drivers of exchange rate appreciation and the general price level are the growth of broad money, influenced by fiscal dominance, some researchers argue that the exchange rate serves as the cause of price level changes and even broad money growth. Others contend that, although the long-term determinant of inflation is broad money growth, exchange rate shocks play a significant role in inflationary surges. This study focuses on examining whether exogenous exchange rate shocks are the drivers of inflationary surges. To this end, the impact of the deviation of the exchange rate from its filtered value, and separately from its value derived from a revised monetary theory, is estimated as an exogenous exchange rate shock on the deviation of inflation from its filtered value. Empirical results for the period 1984–2023 indicate that the deviation of the exchange rate from its filtered value has a significant effect on the deviation of inflation from its filtered value, whereas the deviation of the exchange rate from the value based on the revised monetary theory does not exhibit a significant impact. Consequently, these findings cast doubt on the notion that exogenous exchange rate deviations are the primary drivers of inflationary surges in Iran.
Keywords: Inflation, Exchange Rate, Monetary Model, Oil Rents, Inflationary surges.
JEL Classification: E31, E50, F40, F30.

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Iranian Economic Review

Articles in Press, Accepted Manuscript
Available Online from 17 November 2025

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