The Impact of the Exchange Rate Regime on Inflation in Iran: A Bayesian Approach Using a Dirichlet Process Mixture Regression Model

Amini, Maryam; Hatamerad, Saman; Adrangi, Bahram

doi:10.22059/jte.2026.398371.1009017

The Impact of the Exchange Rate Regime on Inflation in Iran: A Bayesian Approach Using a Dirichlet Process Mixture Regression Model

Document Type : Research Paper

Authors

¹ Department of Economics, Faculty of Humanities, University of Zanjan, Zanjan, Iran.

² Department of Economics, University of Portland, Portland, USA.

10.22059/jte.2026.398371.1009017

Abstract

The main objective of this study is to examine the impact of exchange rate regimes on inflation, focusing on the role of liquidity growth, global Brent oil price fluctuations, and government spending. DPMR used data from 1383Q1 to 1402Q4. The model identified five structured clusters, in each of which the magnitude and direction of the variables' impact on inflation differed. The within-regime variance ranges from very low (stable regime) to very high (unstable regime). The regimes are: oil-driven with high inflation (oil shocks as the main driver, neutral domestic policy); stable with controlled oil effect (fiscal discipline and effective exchange rate stabilization); unstable with simultaneous oil and government effect (structural crisis, rising inflation); domestic demand-driven inflation (government spending pressure, oil ineffective); Deflation/stagflation (reverse effects of money and spending, deflationary stagnation). The findings also show that oil price fluctuations are the most stable and powerful inflation driver, with strong and positive effects even in stable regimes. Liquidity growth has a positive but scattered effect; the negative median and high inter-cluster variation indicate instability of the money-inflation relationship. In neutral or reverse crisis regimes, it acts as a deflationary in a recessionary regime. This heterogeneity necessitates context-based monetary policy. Government spending has a dual function: controlling inflation in oil-driven and recessionary regimes (1, 2, and 5) through price stabilization; and stimulating inflation in crisis and demand-driven regimes (3, 4) through pressure on aggregate demand. This structural heterogeneity rejects fixed causal relationships and emphasizes the contextuality of policymaking. The policy implication strongly suggests that a single prescription for containing inflation is ineffective, and policymakers should act regime-oriented.

Keywords

Main Subjects

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