Regional and Global Drivers of Iran’s Inflation: Evidence from a GVAR Model Featuring a Dominant Unit

Authors

1 Department of Economics, Yazd University, Yazd, Iran.

2 Department of Economics, Ferdowsi University of Mashhad, Mashhad, Iran.

Abstract

Increasing international interdependence leads to a higher degree of inflation vulnerability to foreign and global shocks. In this regard, inflation management is one of the most important challenges various countries are facing in the global economy. The aim of the present paper was to examine the regional and global origins of inflation in Iran. A GVAR model featuring a dominant unit was estimated for 34 countries during 1988Q4-2016Q4. The findings indicated that Iran inflation is directly and positively affected by oil and food price shocks in both the short and long run. Furthermore, there are relatively strong spillover effects, and hence inflationary pressures are exacerbated due to the higher inflation rates of Iran’s trading partners. Almost 21 percent of Iran’s inflation changes are explained by foreign shocks. About 8 percent are attributed to inflation of Iran’s trading partners that one-third of this contribution is related to China and India, and one-fourth to Latin America and Turkey. The findings reveal that Iran’s economy has a high degree of vulnerability to regional and global shocks.
 

Keywords