Symmetric and Asymmetric Effects of Economic Uncertainty on Money Demand in Iran

Uncertainty is a major challenge for economic agents and policymakers, and is one of the effective factors in causing fluctuations in macroeconomics. Economic uncertainty changes the demand for money by affecting people's expectations of the future state of the economy. In this study, the effect of economic uncertainty on money demand in Iran during the period from the first quarter of 2004 to the third quarter of 2018 has been investigated. Hence, the liquidity demand function is estimated using an Auto-Regressive Distributed Lag model and quarterly data of liquidity volume, national income, bank interest rate, inflation rate, exchange rate and economic uncertainty index. The results show that economic policy uncertainty has a significant effect on liquidity demand. In examining the asymmetric effects, both increase and decrease of uncertainty show a negative effect on liquidity, indicating asymmetric response. Therefore, the economic policy uncertainty index is effective in predicting fluctuations of money demand in Iran.