Nonlinear Modeling of Structural Breaks Concerning Money Demand Function in Iran Using Fuzzy Approach

The main purpose of this paper is to introduce a method for more accurately measurement of structural breaks’ impacts of money demand function using fuzzy set approach. Hence، we present a robust method in order to modeling endogenous structural breaks. To do this، first، we review the recent studies on modeling structural breaks in money demand using nonlinear transition functions and fuzzy set theory، then we examine theoretical basics of fuzzy sets، membership and transition functions. In this paper، we model the structural breaks in money demand function via fuzzy set theory by using transition function instead of membership functions. In this regard، after introducing a new transition function، we model the 1993 structural break of money demand in Iran using a binary dummy variable and various transition functions. The findings show that the AS transition function due to more flexibility provides more accurate results rather than binary dummy variable، exponential and logistic transition functions. In general، if the dependent variable of the model is stationary، use of the binary dummy variable for modeling structural breaks causes misspecification. Also، if the dependent variable is non-stationary، due to increasing shock effect، the use of binary dummy variable is wrong.