The Effect of Population Age Structure Change on the Component of Money Demand in the Iranian Economy

In the literature, money demand is usually related to some key variables such as income, interest rate, exchange rate and inflation. But in the societies that population age distribution has changed drastically, age structure is also an important explanatory variable that should be considered in a well defined money demand function. The absence of such variable from money demand function might not lead to a co-integrated equation. Hence the estimated parameters would not be reliable. In this article, by the aid of Ando and Modigliani’s life cycle theory of consumption, three money functions are specified for the components of liquidity that encompasses a variable which represents changes in the age distribution of the society. The specified equations are estimated using time series data for the period 1959 to 2014. ARDL method of estimation is adopted. The results show that by increasing the portion of middle age group in the population, who’s marginal propensity to consume is low, the demand for currency and checking accounts decreases while the demand for time deposits tend to increase.