Asymmetric Effects of Exchange Rate on the Money Demand Function in Iran

Considering the exchange rate changes due to different foreign exchange policies in recent years, the study of the effect of currency shocks on the demand for money in Iran can lead to useful results. Therefore, in this study, we investigate the symmetry or asymmetry of the effect of positive and negative exchange rate shocks on money demand function by using Nonlinear Autoregressive Distributed Lag model on the latest seasonal data up to year 1396. At first, the existence of long-term equilibrium relationship was examined using Pesaran Bound test and was confirmed. The results of the model show that Growth Domestic Production (GDP) and Ratio of government budget deficit to GDP have positive effect on money demand and inflation has negative effect on it. The results also indicate that GDP and the state budget deficit variables positive impact on the money demand and inflation has a negative impact. According to the results of the Wald test, the level of positive and negative shocks of exchange rate on money demand is asymmetric in the short run but symmetric in the long run. Also by comparing the positive and negative effects of exchange rate shocks on money demand, it can be concluded that the positive effect of exchange rate shocks on money demand is more than the negative effect of shocks on exchange rate.