Modeling Money Demand under the Profit-Sharing Banking Scheme: Evidence on Policy Invariance and Long-Run Stability
This paper extends the literature on interest-free banking systems by modeling money demand equations for Iran which has followed the profit-sharing scheme since the mid-1980s. Using quarterly data spanning the period 1966-2001, we estimate two alternative demand equations for M1 and profit-sharing deposits. Unlike prior research, this paper focuses on whether the estimated equations are policy invariant in addition of being temporally stable in the short- and long-run. Our empirical results persistently suggest that the two money demand models, and especially the demand for profit-sharing deposits, are structurally stable and policy invariant despite the numerous shocks that have characterized Iran in recent years. These results provide another piece of evidence supportive of the merit of the interest-free banking system, and suggest that profit-sharing monetary aggregates represent a credible instrument for monetary policy-making in Iran.
|Date of creation:||15 Nov 2003|
|Date of revision:||Apr 2007|
|Publication status:||Published: Revised version in Global Finance Journal, Vol. 18, No. 1 (April 2007), pp. 104–123|
|Contact details of provider:|| Postal: |
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Johansen, Soren, 1995. "Identifying restrictions of linear equations with applications to simultaneous equations and cointegration," Journal of Econometrics, Elsevier, vol. 69(1), pages 111-132, September.
- Abdel-Hameed M. Bashir, 2002. "The welfare effects of inflation and financial innovation in a model of economic growth: An Islamic perspective," Journal of Economic Studies, Emerald Group Publishing, vol. 29(1), pages 21-32, January.
- Psaradakis, Zacharias & Sola, Martin, 1996.
"On the power of tests for superexogeneity and structural invariance,"
Journal of Econometrics,
Elsevier, vol. 72(1-2), pages 151-175.
- Z. Psaradakis & M. Solá, 1993. "On the power of tests for superexogeneity and structural invariance," Documentos de Trabajo (working papers) 0993, Department of Economics - dECON.
- Stock, James H. & Watson, Mark W., 1989. "Interpreting the evidence on money-income causality," Journal of Econometrics, Elsevier, vol. 40(1), pages 161-181, January.
- Favero, C. & Hendry, D., 1990. "Testing The Lucas Critique: A Review," Economics Series Working Papers 99101, University of Oxford, Department of Economics.
- Aggarwal, Rajesh K & Yousef, Tarik, 2000. "Islamic Banks and Investment Financing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 93-120, February.
- Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
- Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
- Stockman, Alan C, 1980.
"A Theory of Exchange Rate Determination,"
Journal of Political Economy,
University of Chicago Press, vol. 88(4), pages 673-98, August.
- Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
- Phillips, P.C.B., 1986.
"Understanding spurious regressions in econometrics,"
Journal of Econometrics,
Elsevier, vol. 33(3), pages 311-340, December.
- Peter C.B. Phillips, 1985. "Understanding Spurious Regressions in Econometrics," Cowles Foundation Discussion Papers 757, Cowles Foundation for Research in Economics, Yale University.
- Mohsin S. Khan, 1986. "Islamic Interest-Free Banking: A Theoretical Analysis (Le systÃ¨me bancaire islamique: analyse thÃ©orique d'un systÃ¨me qui ne fait pas appel Ã l'intÃ©rÃªt) (La prohibiciÃ³n islÃ¡mica de los intereses," IMF Staff Papers, Palgrave Macmillan, vol. 33(1), pages 1-27, March.
- Guidotti, Pablo E, 1993. "Currency Substitution and Financial Innovation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 109-24, February.
- Mankiw, N. Gregory, 1992.
"The reincarnation of Keynesian economics,"
European Economic Review,
Elsevier, vol. 36(2-3), pages 559-565, April.
- Mankiw, N.G., 1991. "The Reincarnation of Keynesian Economoics," Harvard Institute of Economic Research Working Papers 1572, Harvard - Institute of Economic Research.
- N. Gregory Mankiw, 1991. "The Reincarnation of Keynesian Economics," NBER Working Papers 3885, National Bureau of Economic Research, Inc.
- Bashir, B. A., 1983. "Portfolio management of islamic banks : `Certainty model'," Journal of Banking & Finance, Elsevier, vol. 7(3), pages 339-354, September.
- Hoffman, Dennis L. & Rasche, Robert H. & Tieslau, Margie A., 1995. "The stability of long-run money demand in five industrial countries," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 317-339, April.
- King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991.
"Stochastic Trends and Economic Fluctuations,"
American Economic Review,
American Economic Association, vol. 81(4), pages 819-40, September.
- Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
- Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
- Tom Doan, . "RATS programs to replicate King, Plosser, Stock, Watson AER 1991 results," Statistical Software Components RTZ00107, Boston College Department of Economics.
- Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
- Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
- Hansen, Bruce E., 1992.
"Testing for parameter instability in linear models,"
Journal of Policy Modeling,
Elsevier, vol. 14(4), pages 517-533, August.
- Tom Doan, . "STABTEST: RATS procedure to perform Hansen's stability test for OLS," Statistical Software Components RTS00199, Boston College Department of Economics.
- Amir Kia, 2003. "Forward-looking agents and macroeconomic determinants of the equity price in a small open economy," Applied Financial Economics, Taylor & Francis Journals, vol. 13(1), pages 37-54.
- Mahmood Yousefi & Sohrab Abizadeh & Ken McCormick, 1997. "Monetary stability and interest-free banking: the case of Iran," Applied Economics, Taylor & Francis Journals, vol. 29(7), pages 869-876.
- Pagan, Adrian, 1986.
"Two Stage and Related Estimators and Their Applications,"
Review of Economic Studies,
Wiley Blackwell, vol. 53(4), pages 517-38, August.
- Adrian Pagan, 1985. "Two Stage and Related Estimators and Their Applications," Cowles Foundation Discussion Papers 741, Cowles Foundation for Research in Economics, Yale University.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Engle, R. & Hendry, D., 1990.
"Testing Super Exogeneity And Invariance In Regression Models,"
Economics Series Working Papers
99100, University of Oxford, Department of Economics.
- Engle, Robert F. & Hendry, David F., 1993. "Testing superexogeneity and invariance in regression models," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 119-139, March.
- Nagayasu, Jun, 2003. "A re-examination of the Japanese money demand function and structural shifts," Journal of Policy Modeling, Elsevier, vol. 25(4), pages 359-375, June.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Muscatelli, V. Anton & Spinelli, Franco, 2000. "The long-run stability of the demand for money: Italy 1861-1996," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 717-739, June.
- Hurn, A S & Muscatelli, V A, 1992. "Testing Superexogeneity: The Demand for Broad Money in the UK," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(4), pages 543-56, November.
- Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
- Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
- Hueng, C. James, 1999. "Money demand in an open-economy shopping-time model: an out-of-sample-prediction application to Canada," Journal of Economics and Business, Elsevier, vol. 51(6), pages 489-503.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
- Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
- Metin, Kivilcim, 1998. "The Relationship between Inflation and the Budget Deficit in Turkey," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 412-22, October.
- Abbas Mirakhor & Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 91/88, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:car:carecp:03-13. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sabrina Robineau)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.