Asymmetric Exchange Rate Pass-Through to Producer Prices in Iran: The Role of Inflation Expectations

Document Type : Research Paper

Authors

1 Department of Economic Statistics and Information, Institute for Management and Planning studies (IMPS), Tehran, Iran.

2 Department of Economics, Shiraz University, Shiraz, Iran.

Abstract

This study investigates the nonlinear, state-dependent dynamics of exchange rate pass-through (ERPT) across Producer Price Index (PPI) sub-sectors in Iran, utilizing quarterly time-series data spanning from 2000Q2 to 2025Q4. Employing a threshold regression framework to capture asymmetric price transmission under varying macroeconomic conditions, the analysis distinguishes between low- and high-inflation expectations regimes. Empirical findings reveal a pronounced regime-dependent escalation in ERPT; at the aggregate level, pass-through elasticity surges from 0.525 in the low-inflation regime to 0.730 in the high-inflation regime, underscoring the pivotal role of inflation expectations in amplifying the transmission of exchange rate shocks into producer prices. This pattern persists robustly across more than two decades of structural economic evolution. Sectoral heterogeneity is particularly evident, with manufacturing and agriculture exhibiting the most significant increases (from 0.607 to 0.938 and 0.467 to 0.868, respectively), reflecting their enduring reliance on imported intermediate inputs. Similarly, the mining and oil & gas sectors demonstrate marked regime shifts consistent with nonlinear adjustment mechanisms in resource-based production. Collectively, these results confirm that ERPT in the Iranian economy is fundamentally nonlinear and state-dependent, with inflation expectations serving as a critical amplification channel. Consequently, the study emphasizes the necessity of accounting for regime shifts, long-run structural transformations, and seasonal dynamics to accurately model exchange rate transmission to producer prices.

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History

  • Receive Date: 25 February 2026
  • Revise Date: 09 June 2026
  • Accept Date: 10 June 2026

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