International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss


Inflation in the Islamic Republic of Iran: Apply Univariate and Multivariate Cointegration Analyses
Hamed Armesh, Abbas Alavi Rad, Ramin Azadavar, Saeid Zarezadeh, Mojtaba Saeidinia

This paper examines the factors that explain and help forecast inflation in Iran. A simple inflation model is specified that includes liquidity (M2), real GDP and import prices, as well as the wheat support price as a monetarist approach. We have used multivariate and univariate cointegration analyses and error correction model (ECM) to determine the effect of liquidity (M2) and other variables on inflation in long run and short run. Quantitative estimates based on the time series annual data from 1961 to 2007, indicate that liquidity (M2) as well as real GDP and import prices have a significant effect on inflation in long run. It is also important that the long run estimated coefficients in ARDL approach the point of view of size element with the Johansen and Juselius (1990) maximum likelihood cointegration approach is symmetrical. The results of ECM show that estimated coefficients of model in short run are less than estimated coefficients in long run. The coefficient of the error correction term (ECT) is equal to -0.31. According to this estimation, speed of adjustment is slow. In addition, the ECM only can explain 85 per cent of fluctuation of prices.

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