The Impact of Increase in Money Supply on Inflation in Iranian Economy: Regime-Change Models

Taking into account the importance of inflation within Iranian economy, this study uses seasonal data from 1990 to 2011 to examine the role of monetary policies adopted by the Iranian Central Bank on the growth in money supply, and its subsequent effect on formation of medium and high-inflation regimes. The role of such monetary policies on the stability of inflation regimes in Iranian economy is also studied. Using the Markov Switching Model, and assuming constant and fixed transition probabilities, the inflation rate variable has been extended. Results suggest that in moderate inflation regime of Iranian economy, each percent increase in money supply is equivalent to 0/57 percent inflation. Furthermore, in high inflation rate regime no significant effect of increase in money supply on inflation was observed. The estimation results from the Markov regime Switching Models- when assuming constant transition probabilities- show positive effects of money supply increase on the sustainability of medium and high inflation periods in Iranian economy