Investigating the interaction effects of inflation, production and exchange rates on the Iranian economy: a model for simultaneous equations

Abstract

Due to the complexity of new economic conditions and the widespread interdependence of economic variables with each other, one of the key challenges in the field of macroeconomic policies is how to simultaneously manage the exchange rate, increase production and control inflation. The basic premise of the simultaneous equilibrium of these three variables and their specific policies is that despite the lack of a fixed relationship between the three variables of exchange rate, inflation and production, these variables have a close relationship with each other. The direction and intensity of the relationship between these variables in relation to the conditions of each country can vary according to their socio-economic and cultural characteristics. This study examines the relationship between exchange rate, inflation and GDP in the Iranian economy during the period (2014-2015), using the model of the system of simultaneous equations and the results of estimating the main models show that in high inflation, the relationship is negative and a breakdown has been observed between inflation and domestic production. On the other hand, there is a positive relationship between inflation and exchange rate variables affecting the Iranian economy, there is also a positive relationship between exchange rate variables and domestic production (excluding oil).

Keywords

• gdp
• inflation
• exchange rate
• concurrent equations