Estimation of Velocity of Money and Liquidity in Iran's Economy

Due to the significant effects of velocity of money and liquidity on economic factors, prediction of behavior of these variables has become necessary for decision making. The aim of this research is to specify and estimate factors affecting velocity of liquidity and velocity of money in Iran based on Friedman’s model of demand for money, during 1971-2003. To this end such factors as exchange rate, expected inflation rate, national income, income distribution and degree of banking system development have been considered; and the autoregressive distributed lag model (ARDL) has been applied to estimate the functions of money velocity and velocity of liquidity. The findings of the research, overall, showed that real national income, interest rate, fair distribution of income and banking system development have significant positive relationship with velocity of both money and liquidity; while exchange rate has negative effect on velocity of liquidity, but not on velocity of money. Both velocity of money and liquidity have not been affected by expected inflation rate. The velocity of money and liquidity in Iran’s economy follow U-shaped curve.