This paper pursues two goals. At first, it uses an unrestricted error correction model (UECM) and the bounds testing approach proposed by Pesaran, Shin, and Smith (2001) to study the short- and long-run effects of bank credit on inflation in Iran, a country with some history of interest-free banking system. Secondly, we examine how institutional and cultural changes resulted from bank nationalization and the implementation of interest-free banking have affected price level movement in Iran. The approach we have used in this paper is capable of testing the existence of long run relations regardless of whether the underlying variables are stationary, integrated, or mutually cointegrated. The results indicate that there exists a long-run relationship between inflation and its main determinants, namely, bank credit, import price, real GNP, and black market exchange rate. However, bank credit has no short-run effect on price level movement in Iran. Furthermore, the paper shows that the nationalization of banks and the implementation of interest-free banking system in Iran have caused a structural change in the behavior of inflation.