The Stability of Money Demand Function in Iran: An Application of Johansen-Juselius Method

Study of money demand function, from the view of research and problem solving in macroeconomics and policymaking, has great importance. True and exact knowledge of money demand function, which effects all principle variables in economics, provides the essential fields for usage of successful economic policymaking. This article studies the money demand function in Iran, experimentally, using Johansen and Juselius method. In this research stability of money demand function for both its limited and wide definition in Iran is confirmed. According to cointegration test, real money balance variables, gross domestic product, rate of inflation, foreign exchange rate and government budget deficit have cointegrated with each other and have established a long term equilibrium relation. The sign of gross domestic product in money demand function or related long term equilibrium relation is positive and significance level above one. The inflation variable, as expected, has a negative sign. These results correspond with other experimental result in Iran and other developing countries. The black market foreign exchange rate and money demand function has reverse relationship which shows substitution effect in related literature. The government budget deficit in the money demand function has negative sign that affirms the neoclassical views in the subject. For short term dynamic research of the given long term equilibrium relation obtained from Johansen- Juselius maximum likelihood method, the methods of variance decomposition and impulse response function have been used, that the obtained results from those ways mentioned above shows rather slow speed of equilibrium.