Evaluating the Explanatory Power of Behavioral Models in Measuring Food Inflation Uncertainty in Iran: A Confrontation between GARCH and Rational Inattention Models

Document Type : Research Paper

Authors

1 Department of Agricultural Economics, Faculty of Economics and Agricultural Development, University of Tehran

2 Development and Foresight Research Center, Planning and Budget Organization, Tehran, Iran.

3 Department of Agricultural Economics, Faculty of Economics and Agricultural Development, University of Tehran, Karaj, Iran

10.22059/ijaedr.2026.413778.669433

Abstract

This study investigates the behavioral roots of persistence in food price inflation volatility and compares its dynamics across urban and rural areas of Iran over the period from April 2003 to January 2026. To this end, a hybrid approach is employed, combining GARCH family models with structural break controls via Fourier trigonometric functions and a semi-parametric model grounded in Rational Inattention theory—which relies on the information flow rate parameter. The findings indicate that the Rational Inattention model, by accounting for information processing capacity constraints, exhibits higher out-of-sample predictive power and explanatory ability-as measured by RMSE and MAE—compared to traditional GARCH and Fourier-GARCH models. The information flow rate in urban areas is estimated to be approximately 2.7 times that of rural areas, indicating a deep information gap between these two markets and the primary cause of stronger volatility persistence in rural regions. Furthermore, based on the Directional Volatility Ratio index, which decomposes variance into upward and downward components, the results reveal that in rural areas, positive price shocks (upward risks) are the main source of uncertainty, whereas in urban areas, volatility stemming from the deflation of price bubbles and mean reversion plays the dominant role in generating fluctuations. Finally, these results underscore the need to upgrade information infrastructure in rural areas and to adopt stabilization policies that account for the distinct behavioral structure of each market.

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References

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Iranian Journal of Agricultural Economics and Development Research
Volume 57, Issue 2
July 2026
Pages 239-256

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