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The Impact of Stock Price Index on Demand for Money in Iran (in Persian)

Author

Listed:
  • Heidari, Hassan

    (Iran)

  • Faaljou, Hamidreza

    (Iran)

  • Adibzadeh, Farhad

    (Iran)

Abstract

Friedman (1988) introduced Stock Price Index (SPI) as explanatory variables into the money demand function. He explained that SPI has two effect substitution and income effects on money demand. This study examines the long-run effect of stock price on demand for money by using Bounds test approach to level relationship and Granger causality test over the period of 1370:1-1386:4 (1990:1-2006:4) Bounds test results strongly confirm the existence of long-run relationship among variables in both demands for real M1 and M2 models. Moreover¡ our result reveals that SPI has a significant substitution effect on long-run demand for real M1 and M2. In these two definitions of money¡ long-run elasticity of real money demand to GDP is greater than one and long-run elasticity of real money demand to exchange rate is positive and less than one. Moreover¡ long-run elasticity for real money demand to inflation and SPI is negative and less than one in absolute value. In demand function for M1 and M2¡ one percent increase in SPI reduces the long-run real money demand about 0.015 and 0.10 percent¡ respectively. The inverse effect of SPI on money demand confirms the existence of substitution effect. Moreover¡ Granger causality test results confirms indirect one-side casualty from the set of independent variables to real M1¡ and M2 at 10 and 5 percent significance level in the long-run¡ respectively. JEL Classification: G1, E41

Suggested Citation

  • Heidari, Hassan & Faaljou, Hamidreza & Adibzadeh, Farhad, 2011. "The Impact of Stock Price Index on Demand for Money in Iran (in Persian)," Journal of Monetary and Banking Research (فصلنامه پژوهش‌های پولی-بانکی), Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 2(6), pages 27-68, March.
    • Handle: RePEc:mbr:jmbres:v:2:y:2011:i:6:p:27-68
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    More about this item

    Keywords

    Stock Price; Money Demand Function; Granger Causality; Bounds Test;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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