Stability of Money demand Function in Iran

Using Johansen-Juselius (1990) co-integration technique and Iranian annual data, stability of money demand function was analyzed. We found that M2 monetary aggregates are Co-integrating with real gross domestic products (GDP), inflation rate and exchange rate in parallel market. To analyze the speed of adjustment, we used residual of long run model in order to estimate an error-correction model (ECM). The coefficient of error-correction term is small (0.16) and says that the process of adjustment in the Iranian money market is very slow. Application of CUSUM and CUSUMSQ test proposed by Brown, Durbin and Evans (1975) reveal that the money demand function is stable over the whole period and we can not reject the null hypothesis of no structural break.