Econometric analysis of money demand function in Iran

The main purpose of this paper is to estimate the demand for money in Iranian economy over 1338-1386 period using co-integration and error correction methodology. The analyses showed narrow definition of money (M1), domestic gross product, parallel exchange rate, prices level and return rate on long-term loans to private sector are integrated. Thus, by using Johansen and Juselius maximum likelihood co-integration approach the long-term demand for money is specified and estimated. Empirical results showed there are two co-integrated vector variables. Error correction of 0.053 indicated that despite long-run equilibrium in the money market, moving towards equilibrium in this market is done slowly. CUSUM and CUSUMQ statistics results showed that money demand function during this period was stable. Moreover, the substitution of money in Iran is confirmed.