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Paper Information

Journal:   IRANIAN JOURNAL OF TRADE STUDIES (IJTS)   WINTER 2001 , Volume 6 , Number 23; Page(s) 6 To 7.
 
Paper: 

TESTING THE CLASSICAL MODEL OF INFLATION IN IRAN: A COINTEGRATION APPROACH

 
 
Author(s):  SHAHIM S.*
 
* SCHOOL OF EDUCATION AND PSYCHOLOGY, SHIRAZ UNIVERSITY, IRAN
 
Abstract: 
Inflation has always been viewed as one of the most important economic indictors. Although there is widely defferent opinions among economists as to the impacts of inflation on economy, but they all agree that the advese affects of high and hyperinflation should be controlled and curtailed. The classical economists believe that the driving force behind inflation is of monetary nature and the phenomenon is mainly due to the expansion of liquidly. They also believe that the driving force behind inflation is of monetary nature and the phenomenon is mainly due to the expansion of liquidly. They also believe that in the Long run money is neutral.
Among the classical economists those monetarists who believe in rational expectation argue that rational expectation leads to the neuterality of money in the long run. Furthermore these economists go further and state that even in the short run, that portion of money which its growth could be predicted, would be neutral.
The main purpose of this article is testing the latter school of thought in Iranian economy. In this respect the maximum likelihood methode of Johansson. S, and k. Juselius has been employed. The results demonstrate that the growth of money and inflation are co-integrated and a one percent increase in money growth leads to 0.9 percent increase in inflation
Furthermore for combining short and long run relationship, the error correction model has been used, The result is to the effect that 18 percent of disequilibria between real and equilibrium rate of inflation is removed or adjusted in each period. The results also show that there is casualty relationship between growth of money and inflation.
Finally and based on the results obtained, it is recommended than in the process of decision makin, the authorities should take into account the role of rational expectation and strengthening the independence of Central Bank. Furthermore it is recommended than the financial deficit of government be financed from other sources and not from the expansion of liquidity of monetization of deficits
 
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