The Study of the Effects of Stock Price Index on Money Demand Function

Stock price index is one of the most important benchmark for measuring stock exchange operation in all of the world’s financial markets. In this paper, we study the effects of stock price index on money demand function for the period 1370-80. In this Paper, we use two definitions for money, broad or narrow definition. The results indicates that these two different definitions of money i.e. M1 and M2 are suitable variables in money demand function of Iran. In other words, both definitions establish a long-term stationary equilibrium relationship. The stock price index as one the variables in the demand function for money, has significant effects. The stock price change has two effects on money demand function which are: positive income effect and negative substitution effect.