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Demand for money in Iran: An ARDL approach

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Author Info
Shahrestani, Hamid
Sharifi-Renani, Hosein

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Abstract

The objective of this study is to estimate the demand for money in Iran using the autoregressive distributed lag (ARDL) approach to cointegration analysis. The empirical results show that there is a unique cointegrated and stable long-run relationship among M1 monetary aggregate, income, inflation and exchange rate. We find that the income elasticity and exchange rate coefficient are positive while the inflation elasticity is negative. This indicates that depreciation of domestic currency increases the demand for money, supporting the wealth effect argument and people prefer to substitute physical assets for money balances that are supporting our theoretical expectation. Our results also after incorporating the CUSUM and CUSUMSQ tests reveal that the M1 money demand function is stable between 1985 and 2006.

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File URL: http://mpra.ub.uni-muenchen.de/11451/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11451.

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Date of creation: 10 Oct 2007
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Handle: RePEc:pra:mprapa:11451

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Related research
Keywords: Money demand; ARDL; Stability; Iran;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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    Other versions:
  4. Bahmani-Oskooee, Mohsen, 1996. "The black market exchange rate and demand for money in Iran," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 171-176. [Downloadable!] (restricted)
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    Other versions:
  16. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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    Other versions:
  21. Bahmani-Oskooee, Mohsen, 1991. "The Demand for Money in an Open Economy: The United Kingdom," Applied Economics, Taylor and Francis Journals, vol. 23(6), pages 1037-42, June.
  22. Bahmani-Oskooee, Mohsen, 2001. "How stable is M2 money demand function in Japan?," Japan and the World Economy, Elsevier, vol. 13(4), pages 455-461, December. [Downloadable!] (restricted)
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