Demand Systems Approach in Deriving Functions of Monetary Assets Demand: A Nonlinear Demand System for Iran's Economy

In spite of the previous literature of demand for money in Iran, which is based on macroeconomic framework, this paper takes a microeconomic approach and investigates the incomes and price – using cost - elasticities of the demand for monetary assets based on a nonlinear demand system. The data covers from 1989 to 2005. The model is specified as a dynamic system to take account of institutional constraints and the dynamic nature of the assets markets. The conclusion is that user cost elasticities of the monetary assets with longer maturities is significantly greater than those of shorter periods. The interesting finding, however, coming from a sensitivity analysis implies that the interest elasticities of the demand for monetary assets are almost zero. In addition, it seems that fluctuations in the elasticities may be directly come from real sector’s fluctuations, as happened in 1995 and 1997. Due to the fact that the estimated elasticities depends poorly on the interest rates, it seems that some appropriate noninterest rate based policies such as controlling inflation organizing and structuring financial markets may significantly alter the using cost, which in turn may result change the demand for monetary assets as well.