RELATIONSHIP BETWEEN MONEY, HIGH-INFLATION AND INFLATION TAX IN IRAN'S ECONOMY

Abstract

After The Islamic Revolution in Iran, inflation became one of the most important problems. in the Iranian economy between 1978 and 1997 average inflation rate was above 20% while average rate of economic growth was only about 1.8%.This paper analyzes the relationship between real money and inflation in the demand schedule for money that Cagan used in his famous study of hyperinflation (1956).The results of this research suggest that Cagan's model of money demand with adaptive expectation hypothesis does indeed provide an adequate explanation of the salient features of the inflationary and monetary experiences of Iran between 1978 and 1997.It appears that unstable growth of money causes instability in price levels. Also the results show that monetary policies in Iran over the selected periods weren't in effect tantamount in maximization of the int1ation tax revenues.