The Effect of Interest-Free Banking Laws on the Structure of Demand Function for Money and Stability of Parameters: The Case of Iran

In the beginning this article deals with the effect of interest-freebanking laws on structure of the country’s demand function formoney in Iran. Subsequently it studies the stability of coefficientsof the demand function for money. In this article the limited andbroad definitions of ‘money’ I.e. m1 and m2 will be used. Themodels have been derived by using Autoregressive Distributed Lag(ARDL) models. The results show that the implementation of thislaw [in Iran] has affected the coefficient of exchange rate in thedemand function. However it has had no effect on coefficients ofinflation and gross domestic product variables. Moreover, it hasalso affected the y-intercept and, subsequently, the structure of m1demand function. In order to analyze the stability of parameters ofthe demand function erogeneity and super erogeneity tests havebeen used. The results of these tests show that the demand functionfor is more stable than that for. This result has special importancefor the authorities making monetary policy.