Estimating the Effect of Liquidity on Inflation Rate in the Economy of Iran

چکیده مقاله

One of the most important and urgent issues in every country that everyone agrees on is the necessity to fight against inflation, prevent the decrease of people’s purchasing power, maintain the purchasing power of the national currency and fight against the causes and roots of this bitter disease and phenomenon which devastates the economy. Given the long history of growing liquidity in Iran and its impact on economic variables, it is necessary to study its impact on the inflation rate as monetary policies are being codified at the macro level.
In this paper, at first, we stated the relationship between liquidity and inflation from the two perspectives, traditional classic and new classic, then we estimated the long-term relationship between liquidity and inflation for the economy of Iran as an econometric model named Johansen-Juselius maximum likelihood method (ML) and auto-regressive distributed lag. According to the results, the amount of liquidity is the most important factor in long-term inflation. Ten percent increase in liquidity in long-term causes 42 percent increase in price index of goods and services. Moreover, we provided short-term dynamic analysis using variance analysis and impulse response functions.

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