Can Inflation be described as a double-edged sword? the case of Iran
This paper employs a threshold regression model and annual data (1960-2008) to identify the major determinants of investment in Iran. It is found real investment is determined by real GDP, the trade openness index and inflation. However, the impact of inflation on investment follows an asymmetry adjustment process. The endogenously estimated threshold value for the effect of inflation on investment is 11.9 per cent. This means if inflation is greater than this threshold, it will have a negative impact on investment. On the contrary, if the annual rate of inflation is below this threshold, not only the negative effect fades away but also rising prices can boost investment. Reducing inflation should be the number one priority on the policy agenda of the Iranian government and this cannot be achieved unless the central bank of Iran operates independently and stops the monetization of the government's massive fiscal deficits.