Investigating the causality Granger relationship between the rates of interest and inflation in Iran.

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Investigating the causality Granger relationship between the rates of interest and inflation in Iran.

INTRODUCTION

Capital is one of the chief factors of the growth and development of the economy. Banks and financial associations, in this regard, can play a fundamental role in the equipment, maintenance and organization of the deposits for investment. In economics, the rate of interest is defined as the sum of money which is awarded to deposit makers or money lenders. The rate of interest is determined by many factors. Inflation, for instance, is one of the factors influencing the rate of interest; since inflation reduces the purchase power and the value of money (especially in long term financial contracts). Therefore, compensating for the devaluation of money has long been become of the interest of banks, and the inflation rate is considered as one of the important issues in economy.

The aim of this study is to test the causal relationship between the rates of interest and inflation in the usury-free banking system of Iran. This research, thus, hypothesizes that the rate of interest is the cause of inflation. In this study the mean of interest rates in long term deposits as well as the inflation rates during 1959-2002 are used.

MATERIALS AND METHODS

Investigating the relationship between the rates of nominal and real interests has a long history. This goes back to 240 years ago when Douglas propounded it before the 1740s, and when Thornton used it as a theory to explain this relationship. Afterwards, the analysis of interest was established in terms of nominal and real rates. This method, however, did not have the needed clarity, accuracy and analytic framework until the time of Fisher. This, of course, does not mean that there were no other economists to have discussed the relationshi...

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