The Interaction between the Monetary Sector and the Real Sector-the Case Of Iran

The interaction between nominal and real sectors is studied based on estimating a simultaneous co-integrated system including foreign and domestic prices, real output, liquidity and exchange rate variables. Two co -integrating vectors namely augmented PPP and demand for money functions are identified. The results suggest that real output is a weakly exogeneous variable and relatively the leading variable being the most exogeneous ofall. All the nominal variables have to bear the burden of short-run adjustment (to long-term trend) endogeneously in different proportions in order to bring the system back to its long-term equilibrium. Our more or less broad substantive finding that output predominatly leads(rather than lags) money supply and the other variables appear to be consistent more with neoclassical or real business cycle approach than with the doctrines as the structuralist. This Finding has strongpolicy implications for any accommodative or excessive monetary expansion since it is likely to be dissipated in terms of relatively higher nominal variables such as prices or exchange rate rather than output. Our more or less broad substantivefinding that output predominatly leads(rather than lags) money supply and the other variables appearto be consistent more with neoclassical or real business cycle approach than with the doctrines as the structuralist. This.Finding has strong policy implications for any accommodative or excessive monetary expansion since it is likely to be dissipated in terms of relatively higher nominal variables such as prices or exchange rate rather than output