Strategic Model of Demand for Money in Iran Using Leontief Model and " Almost Ideal Demand System"

It is important to identify demand for money in a country as well as combination of the money saved by people and how to substitute them in order to formulate strategic monetary policies. It is very important to decision-makers to know how significant their decisions will be. Therefore, before making a decision, they must measure the impact of those decisions according to people’s behavior and offer the best proposal.This paper uses two flexible function forms to analyze demand for money: Almost Ideal Demand System (AIDS), and Leontief Model. It is necessary to select a suitable model to represent people’s behavioral model. Past models estimated demand for money in Iran without attention to functional forms of demand and did not consider weak substitution among monetary components of the system.In this study, we use AIDS and Leontief Model to test “weak monetary substitution component” theory. Findings uphold the hypothesis of the research. As for people’s sensitivity toward increased revenues, findings show traction of three components has been on the fall in recent years.Estimation of demand for money in Iran according to functional forms is done using monthly data series pertaining to 1995-2007. Finally, policy recommendations are provided on the basis of estimated parameters and various forms of traction (income, price, and Murishima Elasticities of Substitution).