The Role of Energy Imbalances and Infrastructure Investment in the Dynamics of Iran’s Inflation Rate: Evidence from a Nonlinear ARDL Approach

Background and Objectives: Persistent inflation remains a major macroeconomic challenge in Iran. Energy imbalance is commonly regarded as a structural source of inflationary pressure, arising from mismatches in energy supply and demand, pricing distortions, and recurring shortages. Energy-sector infrastructure investment is expected to alleviate these pressures by easing capacity constraints and production bottlenecks. However, inflation may respond asymmetrically to deteriorations and improvements in energy conditions. This study examines the relationship between energy imbalance and inflation in Iran, allowing for nonlinear and asymmetric effects. Using annual data for 2001–2023 (1380–1402), it assesses whether positive and negative changes in energy imbalance affect inflation differently, while controlling for infrastructure investment, the interbank interest rate, and real GDP.
Materials and Methods: Annual time-series data for Iran over 1380–1402 (23 observations) are used. Inflation (annual CPI growth) is the dependent variable, with energy imbalance (ENR), energy-sector infrastructure investment (INV), the interbank interest rate (INT), and real GDP (GDP) as explanatory variables. Asymmetry is modeled using a nonlinear ARDL (NARDL) framework that decomposes energy imbalance into positive (ENR+) and negative (ENR−) changes. ADF unit-root tests confirm that no variable is integrated of order two. Lag orders are selected by AIC with a restricted range (0–2), and the model is estimated in an error-correction form. Long-run effects, asymmetry (Wald) tests, and standard diagnostic and stability checks are reported.
Results: The bounds test indicates only weak evidence of a long-run relationship at the 10 percent level, and the error-correction term is negative but statistically insignificant. In the short run, lagged inflation shows marginal mean reversion, while positive changes in energy imbalance have a positive but insignificant effect on inflation. Other short-run effects, including infrastructure investment, the interbank rate, and GDP, are insignificant. In the level component, infrastructure investment enters with a negative sign and borderline significance, whereas ENR+ and ENR− are insignificant. Long-run asymmetry is not supported by the Wald test. Diagnostic and stability tests do not reveal major econometric problems.
Conclusion: The NARDL results do not provide strong statistical evidence of cointegration, robust long-run adjustment, or asymmetric long-run effects of energy imbalance on inflation in Iran over 2001–2023.
Short-run effects are weak, and infrastructure investment shows only marginal support. Accordingly, policy implications should be stated cautiously. While the findings do not support strong claims about long-run or asymmetric inflationary effects, they suggest that further analysis using higher-frequency data, alternative measures of energy imbalance, and explicit treatment of structural breaks remains warranted.