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This paper addresses two questions. Does inflation in Iran stem from fiscal policy? Does inflationary impact depend upon the sources of budget deficit financing? Although the above questions have already been studied, there is no consensus on the findings, since the results are sensitive to the methodologies and the time period covered by the data. This paper employs vector autoregressions, impulse response functions, variance decomposition and cointegration techniques to estimate the short and long term relationship between inflation and a number of fiscal indicators in Iran. The annual data are used over the period 1973 to 2006. Particular emphasis is placed on the government budget deficit predominantly financed by government borrowing. The results indicate that inflation is mostly induced by import prices, oil revenue and government budget deficit.

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Iran’s economy is vulnerable to fluctuations in oil price. This study examines the impact of oil shocks on economic growth using Vector Auto-Regressive (VAR) method. The Mork’s (2010) method was used to test hypothesis of symmetry in negative and positive shocks. The results show that, the effects of negative and positive shocks on economic growth are asymmetric. In addition, the results of variance decomposition of economic growth indicate that the effects of positives shocks in explaining economic growth fluctuations are greater than negative ones. On the other hand, the results from impulse response functions show that positive and negative shocks have positive and negative effects on economic growth, respectively; however, the size of positive shocks impact on output growth is far more than that of  negative shocks in the long-run. Moreover, the estimated VAR model shows that there is a high and positive correlation between oil revenues and gross domestic product (GDP), which confirms again dependency of national economy to oil revenues.

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In the macroeconomics and international economics literature, the rate of change in domestic prices as a result of exchange rate changes is known as the degree of exchange rate pass-through. This is important because the shocks to the economy are transmitted from the exchange rate channel to the relative prices of the economy. In addition, the degree of exchange rate pass-through is affected by microeconomic and macroeconomic variables, so that the degree of exchange rate pass-through will change along with their changes. Therefore, in the present study, the impact of exchange rate on domestic prices is estimated by using the Time-varying Parameter Factor Augmented Structural VAR with Stochastic Volatility (TVP-SFAVAR-SV) and applying seasonal data from 1990 to 2018. First, the latent variable of the amount of speculative activities in the Iranian economy is modeled and estimated. The results show that the highest speculation belongs to the periods 1994 -1996, 1998-1999 and 2011- 2012. Also, the shock to the speculative activities variable in the period under study has led to an increase in inflation. The estimated exchange rate pass-through coefficient has not been constant. Historical variance decomposition analysis of exchange rate pass-through in the presence of the effective factors also shows that the almost all exchange rate fluctuations can be explained by inflation and exchange rate fluctuations, and production gaps.