The Iranian economy is suffering from a high inflation rate mainly caused by its current monetary policy. The present study argues in favour of an inflation-targeting monetary policy and develops an exchange rate model that is consistent with this new policy direction. In the first stage of this study, we estimate the zero-inflation exchange rate, or the reference exchange rate. Then, we apply an ARDL co-integration approach to estimate the long-term relationship between the inflation rate and the deviation of the official rate from the reference rate (ERD). Results indicate that 1% change in ERD has 0.10% positive impact on the inflation rate. Other explanatory variables included in this model, such as excess money supply and oil revenue, also, influence the inflation rate. Estimated coefficients are statistically significant at the 1% level.
|Number of pages||18|
|Journal||International research journal of finance and economics|
|Publication status||Published - 2007|
- inflation targeting
- exchange rate model
- ARDL model
- oil revenue