Studying the Relation Between Financial Reforms and Demand forMoney Stability in the Iranian Economy

The stability or instability of demand for money is the main determinant of condition for choosing the money supply or interest rate as de facto the leading apparatus of monetary policy. Though, it is worth to note that on theoretical ground, the demand for money can per se be affected by financial reforms propounded by the monetary authorities. In this paper, an attempt is made to investigate the impact of financial reforms in Iran on stability of demand for money viz-a-viz expounding the ex-post history of these reforms for constructing a financial reform index during the period of 1973-2012. Then, we divided the whole sample period of study into two sub periods, as pre and post periods of financial reforms de jure and subsequently, we estimated the demand for money through utilizing the Error Correction Model for the whole and two sub periods, to compare the pertinent co-efficients. The results prima facie indicate that the financial reforms, do not bear the significant effect on demand for money and the money demand function has been stable during the sample period, quid pro qua. Furthermore, we tried to examine the stability of demand for money, using the cusum and cusum of Squares Test, in which the results of these tests have confirmed the postulation that the demand for money function in Iran is stable in toto. Hence, based upon these findings, we can specify that the most appropriate paraphernalia for conduction of monetary policy in Iran is the money supply, which can falsify the ruling orthodoxy among the conventional monetary policymakers of Iran that the interest rate is more relevant and convenient tool for implementation of monetary policy in Iran ipso facto.