The Analysis of Relationship Between Inflation and Economic Growth in Iran

Authors

1 Faculty member of Shahid Beheshti University

2 Faculty member of Sanati Ssharif University

3 M.A. in Economics

Abstract

Economists and government authorities have been paying special
attentions to the factors affecting economic growth, with it; they are
going to achieve high and firm economic growth. Based on some
studies, inflation and its destructive effects are known as cutting edge
in this regard. So, analyzing the relationship between inflation and
economic growth is an important case study which researchers tend
to concentrate on. Through four sections, this paper with an emphasis
on Iran's economy is going to study interrelationship between two
above – mentioned variables through ٤٥ years (١٩٥٩ to ٢٠٠٤). The
main presupposition, here, is the existence of non- linear relationship
between inflation and economic growth in the mentioned period. In
regard to attributes of Iran's economy, the model which has been
designed here, relies on Barro, Alexander and Sarel models. We have
estimated the model by econometric techniques (with and without
lags). Various thresholds are considered for the inflation rate.
Considering the variables in this regard, the CLS method is applied to
evaluate the model. Through reduction of errors square roots, it is a
criterion for picking effective inflationary threshold up. During the
five years study, it shows that: ١- for low levels, there is a unilateral
and causal relationship between inflation and economic growth, ٢- for
medium levels; the relationship between inflation and economic
growth is sort of positive relationship (just up to ٢٦ percent for a
period), ٣- For high levels, all inflation rates, above ٢٦ percent, do
have neutral and then negative impact on economic growth, ٤-
Finally, based on Gringer testing model, it is shown that there is a
significant relationship from inflation to growth.

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