Investigating the Impact of Liquidity Components on Inflation in Iran: Averaging and Machine Learning Approaches

Document Type : Original Article

Authors

1 PhD Candidate in Economics, Faculty of Economics and Management, University of Tabriz, Tabriz, Iran

2 Assistant Professor of Economics, Faculty of Humanities, University of Zanjan, Zanjan, Iran

3 Assistant Professor of Economics, Faculty of Entrepreneurship, University of Tehran, Tehran, Iran

4 Associate Professor of Economics, Faculty of Economics and Management, University of Tabriz, Tabriz, Iran

5 Professor of Economics, Faculty of Economics and Management, University of Tabriz, Tabriz, Iran

10.48308/jem.2025.236260.1934

Abstract

Monetary policies and factors influencing liquidity creation are among the key drivers of inflation in the economy. Various elements play a role in the process of liquidity creation and analyzing the impact of each can greatly aid in controlling inflation and shaping macroeconomic policies. This study investigates the effects of different components of liquidity on inflation in Iran during the period 1981-2021, employing Bayesian averaging methods. Using three Bayesian averaging techniques -BACE, BAS, and BMA- the study identifies the main factors influencing inflation. Subsequently, inflation models are estimated using JMA and MALLOWS methods. Robust checks, conducted via machine learning techniques, confirm the findings of JMA and MALLOWS. The results reveal that among the six key factors contributing to liquidity creation, the most significant drivers of inflation are commercial banks overdraft, the money supply, and inflation expectations. Across all methods employed, the findings indicate that the net debt of government to the central bank has a far smaller inflationary effect compared to the aforementioned three factors. Additionally, growth in quasi-money and the central bank's foreign assets exhibit anti-inflationary effects.

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Main Subjects

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Journal of Economics and Modelling
Volume 15, Issue 2 - Serial Number 58
September 2024
Pages 33-65

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