Free-Market Exchange Rate and Rigidity of Prices in Iran By Nonlinear ARDL Approach

Shahryar Zaroki, Arman Yousefi barfurushi

Abstract


The objective of this paper is to investigate the asymmetric effect of free-market exchange rate on consumer price index (CPI) at the aggregate level and the ten subgroups of goods and services using monthly data from 2002:5 to 2018:8 by NARDL. The results of this research show that in the long run, free-market exchange rate appreciation has a direct effect on the CPI at the aggregate level and CPI of all subgroups except for communication, housing and healthcare. In addition, free-market exchange rate depreciation does not have a significant effect on the CPI at the aggregate level and all subgroups except for the education. Accordingly, the asymmetric hypothesis of the effect of the free-market exchange rate on the CPI at the aggregate level and the subgroups (food and tobacco, Apparel and shoe, furniture and appliances, transportation, recreation and culture, education, hotel and restaurant) cannot be rejected. In addition, the hypothesis of the downward price rigidity during free-market exchange rate depreciation cannot be rejected. Furthermore, the money (M1) has a direct effect on the CPI at the aggregate level and most subgroups, which shows inflation is a monetary phenomenon


Keywords


Rigidity of Prices, Free-market exchange rate, NARDL, Iran.

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