The Effect of Governance and Political Instability Determinants on Inflation in Iran

Empirical literature that examines the determinants of inflation in Iran has suggested inflation as a monetary phenomenon. This study investigates the effect of political instability and governance parameters on inflation in Iran over 1959 to 2010. This research sought to identify the profound factors which determine inflation in Iran. Using a combination of the predictions of Fiscal Theory of Price Level (FTPL) determination and Political Economy of Macroeconomic Policy (PEMP) literature and applying the Generalized Method of Moments (GMM), we study this relationship through two different models. The results of monetary model indicate that the effects of monetary determinants depend on the political environment of Iran. The political model expresses a positive relationship between inflation and political instability and governance parameters.