جستارهای اقتصادی (Sep 2004)
A Projection of inflationary gap on the basis of P* model in Iran
Abstract
Different economic schools have for long been discussing therelationship between money and price introducing different definitionsof inflation on the basis of their particular views. However, it can be saidthat most of the economists unanimously believe that inflation in thelong run is a monetary phenomenon.Iran has experienced different rates of inflation in the period betweenA.D. ١٩٦١-١٩٩٨ A.H. (solar) ١٣٤٠-١٣٧٧. Several extensive studies weremade in Iran to analyze this issue, most of which concentrated onmonetary approach.In this paper we, too follow the monetary approach in our discussion ofthe subject relying on the recently introduced P* Model Method.Velocity and output gaps and the occurrence of financial innovationsand major developments in money circulation (velocity) were used inmaking this study.First we try to apply the performance of the standard P* model in Iran.Then the extended P* model, in which both domestic and foreign pricegaps are considered, will be examined.The Results of the study show that the domestic price gap cannotexplain the inflation in Iran. The reason is that because velocity isunstable, it depends on volatility of exchange rate. Also, the output gapdoes not play a significant role in various versions of their inflationmodels. On the other hand, aggregate price gap and foreign price gapexplain our inflation clearly and it can be said that foreign price gap hasa crucial role in defining inflation.
