The Threshold and Nonlinear Effect of Real and Nominal Variables on Inflation: the TAR Approach

Document Type : Original Article


1 Department Economics, Faculty of Economics, University of Tehran

2 Ph.D. Candidate in Economics, Faculty of Economics, University of Tehran


The aim of this study is to examine the nonlinear behavior of nominal and real variables on inflation based on seasonal data for the period 1990:3-2014:1 using TAR model. Liquidity growth recognized as threshold variable and rate of 5.57 percent (22.28 percent per year) as the threshold value. In the regime of low liquidity growth, inflationary expectations and the exchange rate fluctuations are the most important determinants of inflation in the economy. In addition, price levels in the low regime lost its long-run equilibrium relationship with other nominal and real variables. In high liquidity growth regime, inflationary expectations, liquidity growth and inflationary uncertainty are considered as the most important determinants of inflation. In addition, the price level deviation from long-run equilibrium relationship is an important factor in the inflationary acceleration, so inflation reacts to this gap rapidly. GDP and its lag in the both regimes is anti-inflationary and this impact is much stronger in low regime and oil revenues in each regime has no such an inflationary effects.


- Adusei, M. (2013). Is Inflation in South Africa a Structural or Monetary Phenomenon. British Journal of Economics, Management & Trade, 3(1), 60-72.
- Asgharpur, H. & Mahdilu, A. (2014). the Impact of Inflationary Environment on Exchange Rate Pass- Through on Import Prices in Iran: Markov–Switching Approach. Quarterly Journal of Economic Research and Policies, 70, 75-102, (In Persian).
- Azizi, F. (2004). Forcasting Inflationary Gap Using P* Model. Economic Essays, 2, 11-38, (In Persian).
- Bahrami, J. & Farshchi, M. (2010). Analysis of Inflation using P* Model. Economics Research, 37, 115-138, (In Persian).
- Bonanto, L. (2007). Money and Inflation in the Islamic Republic of Iran. IMF Working Paper, Middle East and Central Asia Department, 37-49.
- Cukierman, A., Web, S.B. & Neyapti, B. (1992). Measuring The Independence of Central Banks and Its Effect on Policy Outcomes. The World Bank Economic Review, 6(3), 353-398.
- Dargahi, H. & Atashak, A. (2002). Inflationary Targeting in Iran. Journal of Economic Research (Tahghighat e Eghtesadi), 37(1), 119-147. (In Persian)
- Enders, W. (2010). Applied Econometric Time Series. 4th Edition, Wiley Publishing.
- Fallahi, F., Asgharpur, H., Motafekar, M.A. & Montazeri, J. (2011). The Eeffect of Inflation on Economic Growth: STR Approach. Journal of Economic Policies, 90, 47-64, (In Persian).
- Farzinvash, A., Asgharpur, H. & mahmudzadeh, A. (2003). Impact of Inflation on Budget Deficit. Journal of Economic Research (Tahghighat e Eghtesadi), 38(2), 115-150, (In Persian).
- Friedman, M. (1969). The Optimum Quantity of Money and Other Essays. Chicago: Aldine.
- Friedman, M. (1970). A Theoretical Framework for Monetary Analysis. Journal of Political Economy, 78(2), 193-238.
- Friedman, M. (1970), The Counter-Revolution in Monetary Theory. IEA Occasional Paper No. 33, London: Institute of Economic Affairs.
- Friedman, M. (1974). Monetary Correction. IEA Occasional Paper No. 41, London: Institute of Economic Affairs.
- Han, S. & Mulligan, C.B. (2002). Inflation and the Size of Government. Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, 2(1), 12-59.
- Hosseininasab, E. & Rezagholizadeh, M. (2010). Analysis of the Fiscal Sources of Inflation in Iran Giving Special Emphasis to Budget Deficits. The Economic Research, 10(1), 43-70 (In Persian).
- Johansen, S. & Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration with Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 4(52), 169–210.
- Karami, V.A. (2009). Impact of Monetary and Exchange Determinants on Inflation in Iran. Journal of Budget and Planinig, 12, 13-38, (In Persian).
- Keynes, J.M. (1930). A Treatise on Money. London: Macmillan.
- Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan.
- Khodaveisi, H., Molabahrami, A. & Hoseini, R. (2013). Forecasting Inflation Based on Stochastic Differential Equations and Alternative Models (A Comparative Study). The Economic Research, 13(1), 25-46, (In Persian).
- Kneller, R., Bleaney, M.F. & Gemmell N. (1999). Fiscal Policy and Growth: Evidence from OECD Countries. Journal of Public Economics, 6(74), 171–190.
- Komeijani, K. & Alavi, M. (2000). Monetary Policy Based on Inflationary Targeting in Iran. Journal of Monetary and Banking Institute, 15, 43-65, (In Persian).
- Lipsy, R.G. (1960). The Relation between Unemployment and The Rate of Change Money Wage Rate in The United Kingdom, 1861-1975; a further Analysis. Economica, 5(27), 1-37.
- Liu, O. & Adedeji, O.S.  (2000). Determinants of Inflation in the Islamic Republic of Iran, a Macroeconomic Analysis. IMF Working Paper (Washington: International Monetary Fund), 1-127.
- Mehrara, M., Barkhordari, S. & Behzadi Soufiani, M. (2016). Impact of Government Spending on Inflation Through Inflationary Environment, STR Approach. Economics Research, 60, 75-103, (In Persian).
- Mohammadi, T. & Talebi, R. (2010). Inflation Dynamics and Relation between Inflation and Nominal Uncertainty using ARFIMA-GARCH. Economics Research, 36, 137-170, (In Persian).
- Moshiri, S. (2001). Forcasting Inflation Using Structural Equations, Time Series and ANN. Journal of Economic Research (Tahghighat e Eghtesadi), 58, 1147-184, (In Persian).
- Musa, Y. & Asare, B.K. (2013). Long and Short Run Relationship Analysis of Monetary and Fiscal Policy on Economic Growth in Nigeria: A VEC Model Approach. Research Journal of Applied Sciences, Engineering and Technology, 5(10), 3044-3051.
- Olayungbo, D.O. (2013). Government Spending and Inflation in Nigeria: An Asymmetry Causality Test. International Journal of Humanities and Management Sciences (IJHMS), 1(4), 21-33.
- Piontkivsky, R., Bakun, A., Kryshko, M. & Sytnyk, T. (2001). The Impact of the Budget Deficit on Inflation in Ukraine. International Association for the Promotion of Cooperation with Scientists from the New Independent States of the Former Soviet Union (INTAS) Research Report, (95).
- Rafiq, S. & Zeufack, A. (2012). Fiscal Multipliers over the Growth Cycle: Evidence from Malaysia. Policy Research Working Paper 5982.
- Shakeri, A. (2008). Macroeconomic, Policies and Theories. Parsnevisa Publishing, (In Persian).
- Snowdan, B. & Vane, H.R. (2014). Modern Macroeconomics, Edward Elgar Publishing.
- Surjaningsih, N., Utari, G.A. & Diah, T.B. (2012). The Impact of Fiscal Policy on the Output and Inflation, Bulletin of Monetary Economics and Banking 367.
- Tanzi, V. (1998). Inflation, Real Tax Revenues and Th Case for Inflationary Finance: Theory with an Application to Argentina. Staff paper, 25, 417-51.
- Tayyebnia, A. & Zandie, R. (2009). The Effects of Globalization on Inflation in Iran, Economic Research of Iran, 38, 53-96, (In Persian).
- Tong, H. (1978). On a Threshold Model, In Pattern Recognition and Signal Processing. Amsterdam Press.
- Tong, H. (1990). Non-linear Time Series: A Dynamical System Approach. Oxford, U.K.: Oxford university Press,
- Tong, H. & Lim K.S., (1980), Threshold Autoregression, Limit Cycles and Cyclical Data. Journal of the Royal Statistical Society, 42, 245-292.
- Zaranejhad, M. & Hamid, SH. (2009). Inflation Rate Forecasting Using ANN (Time Series Approach). Journal of Quantitative Economic, 1, 145-167, (In Persian).