Estimation of modified Cagan money demand function with exogenous shocks in Iran economy

Document Type : Research Paper

Author

Abstract

Iran’s economy is recognizes as a high inflationary country (For near almost all years after Islamic revelation)  which is suffered to external shocks such as external  conflict interactions (for example war and sanctions) and   oil price shocks. Therefore, analysis and estimation of money demand in Iran should consider above issues in order to have efficient  money supply  policy.
This paper, apply HSE index to estimate the effects of external conflict  interactions. Hodrick-Prescott filter has been used to estimate expected inflation. The money demand function of modified Cagan’s is estimated during 1979 to 2013 by ARIMAX and VAR methods. The results show that, expected inflation by 3 lags, has negative effect on money demand but external conflict interactions by two lags and oil price has positive effects on the money demand.

Keywords


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