Regional and Global Drivers of Iran’s Inflation: Evidence from a GVAR Model Featuring a Dominant Unit

Increasing international interdependence leads to a higher degree of inflation vulnerability to foreign and global shocks. In this regard, inflation management is one of the most important challenges various countries are facing in the global economy. The present paper aimed to examine the regional and global origins of inflation in Iran. A GVAR model featuring a dominant unit was estimated for ۳۴ countries during ۱۹۸۸Q۴-۲۰۱۶Q۴. The findings indicated that Iran’s inflation is directly and positively affected by oil and food price shocks in both the short and long-run. Furthermore, there are relatively strong spillover effects, and hence inflationary pressures are exacerbated due to the higher inflation rates of Iran’s trading partners. Almost ۲۱ percent of Iran’s inflation changes are explained by foreign shocks. About ۸ percent are attributed to the inflation of Iran’s trading partners that one-third of this contribution is related to China and India, and one-fourth to Latin America and Turkey. The findings reveal that Iran’s economy has a high degree of vulnerability to regional and global shocks.

Keywords:

Iran’s Inflation , Spillover effect , Global VAR , Dominant Unit , Variance Decomposition