Asymmetric Behavior of Inflation in Iran: New Evidence on Inflation Persistence Using a Smooth Transition Model

Abstract

This paper investigates the asymmetric behavior of inflation. We use logistic smooth transition autoregressive (LSTAR) model to characterize the regime-switching behavior of Iran’s monthly inflation during the period May 1990 to December 2013. We find that there is a triple relationship between the inflation level, its fluctuations and persistence. The findings imply that the behavior of inflationary process is asymmetric. There are two inflationary regimes in Iran’s economy, one is stable with little fluctuations, and the other is unstable that lead to higher inflation, more fluctuations and higher persistence. The results also show that the persistence of inflation is significantly and positively related to inflation level. Therefore, the inflation tends to converge towards the long-run value slowly in the high-inflation regime compare to the low-inflation regime. For this reason, inflation rates tend to be self-generating and self-perpetuating inflationary process in the higher-inflation regime (for example after 2011), while in the lower-inflation regime (for example during 2000 to 2005) is not.