Inflation, Credit Control and Seigniorage: The Case of Iran

Abstract

This paper examines the structure, causes and pattern of inflation in Iran. An econometric model of inflation composed of four simultaneous equations is developed and estimated fur the sample period 1971-1991. The results suggest that the major causes of inflation in Iran are seigniorage due to the persistent government budget deficits, lack of fiscal and monetary disciplines, and adverse supply shocks. The pattern of inflation in Iran is consistent with the neoclassical theory of money and inflation. The results also show that the government credit control is neither an efficient allocative mechanism for financial resources nor an effective monetary policy instrument. These findings contradict the government's presumption that, within the present structure of the Islamic banking system, credit allocation can better help the economy achieve target rates of output, inflation, and employment. (B31, BSl)