Causality between Money and Inflation in the Iranian Economy

The main goal of this paper is to investigate the causality between money and inflation in the Iranian economy. In doing so, we have first reviewed theoretical and empirical literature of causality throughout the world and then we used Granger''s method for detecting causality between money and inflation in the Iranian economy. We then used Johansen procedure in order to test weak exogeneity for taking result that weather money affect inflation or vice versa. The results show that in the short run, money causes inflation but in the long run money cannot affect the inflation. Moreover in the short run monetary policy is effective, whereas in the long run money stock is only passive.