Investigating the Impact of Inflation on Growth in Iran Economy

Investigating the relationship between inflation and economic growth is important for the conducting and setting of monetary policy. In the economic theories and results of empirical studies, there is no general consensus about how inflation rate affects economic growth and conflicting results (positive or negative linear relationship or nonlinear relationship with one or two threshold) were reported. In this study, we have tried to determine the threshold values of inflation rate in growth-inflation relationship and explain the nature of the growth effects of inflation in Iran economy. Also, transitional mechanisms of inflation effects on economic growth in period of 1961-2008 were investigated. The results confirmed the existence of threshold effects and also nonlinear nature of the relationship between economic growth and inflation in Iran economy, so that the effect of inflation on the economic growth is positive in inflation rate of less than 10%, while this relationship is negative in inflation rates between 10 and 28 percent. when the inflation rate is higher than 28%, not only the effect of inflation on growth is negative but also the marginal cost of inflation is increasing. Based on the results, the effects of inflation rate increase are transmitted to lower economic growth through the both mechanism: reduction of the level and efficiency of investment. Target inflation rate in the Iran economy to stimulate economic growth can be 10 percent. Beyond this level, any increase in inflation will lead to an economic uncertainty, reducing the level and efficiency of capital and ultimately to lower economic growth.