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

Document Type : Original Article

Authors

1 Department Economics, Faculty of Economics, University of Tehran

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

Abstract

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.

Keywords

References

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