Using Johansen-Juselius (1990) co integration technique and Iranian annual data,
stability of money demand function was analyzed. We found that Mz monetary
aggregates is Co integrating with real gross domestic products (GDP), inflation rate
and exchange rate in parallel market. To analyze the speed of adjustment, we used
residual of long run model in order to estimate an error-correction model (ECM).
The coefficient of error-correction term is small (0.16) and says that the procces of
adjustment in the Iranian money market is very slow.
Application of CUSUM and CUSUMSQ test proposed by Brown, Durbin and
Evans (1975) reveal that the money demand function is stable over the whole period
and we can not reject the null hypothesis of no structural break.
JEL Classification: E41, E51, P24.