Analyzing the Money Demand Function in Iran

Abstract

Demand for money is an important part of macroeconomic models and the monetary policy; furthermore, demand for money and its stability are important in an economy especially in the design of monetary policy. We estimate the Iran’s demand for money for period (1971-2008) using the autoregressive distributed lag (ARDL) method. We also use the error correction model for short-run dynamic analysis and stability test in model. The explanatory variables include gross domestic product, inflation rate, and foreign exchange rate, short-run and long-run interest. The results show that there is a long-run equilibrium relationship between the variables. According to our finding , the gross domestic product have positive impact on the demand for money and exchange rate and inflation rate have significant negative effects on the demand for money in Iran.