Investigating the Causality Granger Relationship between the Rates of Interest and Inflation in Iran

With regard to the importance of the rates of interest and inflation in economy, this paper aims at investigating the Granger causality relationship between the rates of interest and inflation in Iran’s economy. Toda and Yamamoto’s Granger test of causality as well as ARDL approach were used to test the hypothesis that the rate of interest is the Granger cause of the rate of inflation. The studied period is 1959-2002. The results show that in Iran’s economy, the rate of (official and non-official) interest is the cause of inflation and not vice versa. This has been confirmed by both of these approaches and can be taken into consideration in Islamic banking.