Determinants of Inflation: A Case Study of Iran

Abstract

The study of causes of inflation has probably given rise to one of the most significant macroeconomic debates in the field of economics. The debates differ in their hypotheses, mainly due to a range of conventional views about the appropriate measure to control inflation and also due to disparity between developed and developing countries. We all know that inflation is related with an excessive growth in money supply; a view originally belongs to monetarists. However, this theory does not explain changes in growth of money supply and its main factors. In this paper we tried to answer this question through a system of simultaneous equations incorporating several variables based on various theories of inflation. Iran was also selected as case of study which has suffered high inflation in the last forty years. Results confirm that money is the main cause, but we found that governmental budget deficit through an increase in money supply also indirectly affect inflation. To explain public deficits it seems that structural problems in generating revenue are to be condemned.