Analysis of the Factors Affecting the Formation of Inflation Expectations due to Political Developments and Changes in Liquidity

Document Type : Research Paper

Authors

1 Assistant Professor, Economic Faculty, University of Isfahan

2 Associate Professor, Economic Faculty, University of Isfahan

Abstract

From the start of the new round of UN sanctions against Iran to the Lausanne Declaration, certain the political developments occurred (e.g. changes in the government and adoption of an interactive approach to foreign policy). These developments have had their impacts on inflation expectations. Based on the experience and global studies,the market rate of exchange (US dollar), the stock price index and the consumer price index (CPI) are all calculated on a monthly basis and considered as the estimates of inflation expectations.
 In this study, we extract the concession function of the economic planner in the context of a conflict economy and on the basis of conflict expectations  of Drezner  (1999 ), which is a theory of dynamic games. Then, we specify this function on the objective of decreasing the expected inflation. In this regard, three regression models were evaluated separately on the basis of the Autoregressive Integerated Moving Average with an explanationary variable (ARIMAX) and rolling regressions. The results show that inflation with a lag and liquidity have had positive effects on the inflation expectations.
Political developments, including changes in the government and negotiating strategies with different lags have been effective in the reduction of inflation expectations. However, due to the long negotiation process,  there would have been unknown changes in inflation expectations.

Keywords

Main Subjects

References

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The Journal of Economic Policy
Volume 10, Issue 20
January 2019
Pages 135-161

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