The Interaction between the Monetary Sector and the Real Sector-the Case Of Iran

The interaction between nominal and real sectors is studied based on
estimating a simultaneous co-integrated system including foreign and
domestic prices, real output, liquidity and exchange rate variables. Two
co -integrating vectors namely augmented PPP and demand for money
functions are identified. The results suggest that real output is a weakly
exogeneous variable and relatively the leading variable being the most
exogeneous ofall. All the nominal variables have to bear the burden of
short-run adjustment (to long-term trend) endogeneously in different
proportions in order to bring the system back to its long-term equilibrium.
Our more or less broad substantive finding that output predominatly
leads(rather than lags) money supply and the other variables appear to be
consistent more with neoclassical or real business cycle approach than with
the doctrines as the structuralist. This Finding has strongpolicy implications
for any accommodative or excessive monetary expansion since it is likely to
be dissipated in terms of relatively higher nominal variables such as prices
or exchange rate rather than output.
Our more or less broad substantivefinding that output predominatly
leads(rather than lags) money supply and the other variables appearto be
consistent more with neoclassical or real business cycle approach than with
the doctrines as the structuralist. This.Finding has strong policy implications
for any accommodative or excessive monetary expansion since it is likely to
be dissipated in terms of relatively higher nominal variables such as prices
or exchange rate rather than output