Study of the Relationship between Inflation Rate and Bank Interest Rate in the Iranian Economy

Abstract

Experts believe that by lowering the interest rate on bank accounts, total cost of goods and services decreases, and secondly, investment production increases, both of which lead to lower inflation and provide stable employment field, on the other hand, are concerned about the negative effects of lowering the interest rate without lowering inflation and know the underlying requirement of nominal interest rate cuts as lowering the inflation rate, and consequently people's inflation expectations and finally, they know the relative positive nominal interest rate. In this study first the direction of a relationship between inflation rate and the interest rate was determined by Granger causality test; the findings showed that the causality direction is from inflation rate to bank interest rate.Following on from the literature, besides the inflation variable, other variables were estimated as independent variables in the model and finally the functional form of the factors affecting the interest rate for 1978-2018 in the framework Autoregressive Distributed Lag method. The results model showed that inflation rate, legal deposit ratio, exchange rate changes, and land price index have a positive and significant effect on interest rate in the short and long run; However, the effect of the economic growth rate on the bank interest rate has been only confirmed in the long run and also indicate that if an unexpected shock enters a bank interest rate variable, it will take approximately three periods for the effects of this shock to be moderated and the economy to return its original equilibrium.