Journal of Economic Research (Tahghighat- E- Eghtesadi)

Journal of Economic Research (Tahghighat- E- Eghtesadi)

Money Demand Determinants and Stability Analysis in the Economy of Iran: Micro foundations Approach

Document Type : Research Paper

Authors
zeinab Orooji
Hassan dargahi
Department of Economics, Faculty of Economics and Political Sciences, Shaid Beheshti University, Tehran, Iran
10.22059/jte.2023.92429
Abstract
nvestigating the mechanism of monetary tansmision, considering the microfoundations in money demand, may propose contradictory policy versus macroeconomic theories since households do not hold money equally. Such pattern of behavior can be explained by the new Keynesian literature, which presents micro-based models with the behavior of heterogeneous economic agents. Evaluating the stability of money demand plays a critical role in economies dependent on natural resources due to nature and effects of shocks, role of money substitute assets, and developments in tradable and non-tradable sectors. Here, the demand functions of real M1 and M2 balances were extracted using microfoundations and then estimated by three methods of ARDL, DOLS, and GMM based on quarterly data of the Iranian economy during 1988-Q12022-Q1. For this purpose, the composition of the common monetary aggregate money and quasi-money was revised due to the liquid nature of some quasi-money components in the economy of Iran. The present study aims to examine the variables affecting money and broad money demand in the short and long term, especially alternative assets such as foreign currency, housing, and other durable consumer commodities and expected inflation. The results indicate that the structural stability of the demand for M1 and M2 during 2010s is considered as doubtful and warning. Based on the error correction coefficients in the ECM models, eliminating the effects of a shock and returning to the long-term trend for M2 and M1 demand lasts about 9 and 5 seasons, respectively, meaning that the effects of shocks on broad money demand are relatively long-lasting compared to narrow money j demand. Overall, selecting monetary aggregates as the intermediate target of monetary policy can challenge the economy of Iran.
Keywords
Economy of Iran
Micro foundations
Monetary Policy
Money Demand Stability
Subjects
  1. ابوالحسنی، اصغر، ندری، کامران، بیابانی، جهانگیر و اخلاقی فیض آثار، هادی (1393). بانکداری الکترونیکی و ثبات تابع تقاضای پول در ایران: مدل راهگزینی مارکف. تحقیقات مدل سازی اقتصادی، ۱۵، 73-94.
  2. بوستانی، رضا و کمیجانی، اکبر (1401). درس‌های ثبات تقاضای ‌پول برای سیاست‎گذاری پولی، تحقیقات اقتصادی. 57 (2)، 259-284.
  3. شهرستانی، حمید و شریفی­رنانی، حسین (1387). تخمین تابع تقاضای پول و بررسی ثبات آن در ایران: تحقیقات اقتصادی، 43(2)، 89-114.
  4. صادق‌زاده‌یزدی، علی، جعفری صمیمی، احمد و علمی، زهرا (1385). برآورد تابع بلندمدت و کوتاه‌مدت تقاضای پول در ایران با استفاده از الگوی خودبازگشت با وقفه‌های توزیعی. پژوهش‌های اقتصادی ایران، 29 (8)، 1-15.
  5. عرب یارمحمدی، جواد و عرفانی، علیرضا (1395). آزمون درونزایی پول در اقتصاد ایران. اقتصاد پولی، مالی، 23 (11)، 100-122.
  6. عرفانی، علیرضا، صادقی، خیام و پویا، محمد مهدی (1392). برآورد تابع تقاضای پول در ایران با استفاده از شاخص دیویژیا، فصلنامه تحقیقات مدل‌سازی اقتصادی، 13(4)، 91 -118.
  7. عزیزی فیروزه و مرادخانی، نرگس (1386). بررسی شاخص قیمت سهام بر تابع تقاضای پول، پژوهشنامه اقتصادی، (7)26، 213-241.
  8. گوگردچیان، احمد، بخشی دستجردی، رسول و هاشمی فرد، عاطفه (1394). رهیافتی از تقاضای پول سیدراسکی در اقتصاد ایران. پژوهش‌ها و سیاست‌های اقتصادی، 23(75)، 211-230.
  9. Abolhasani, A., Nadari, K., Biabani, J., & Akhlaki F. A., H. (2014). Electronic banking and stability of money demand function in Iran: Markov choice model. Economic Modeling Research, 15, 73-94.
    (in persian).
  10. Albulescu, C.T., & Pepin, D. (2018). Money demand stability, monetary overhang and inflation forecast in the CEE countries, CRIEF - Centre de Recherche sur l'Intégration Economique et Financière.
  11. Albulescu, C. T., Pepin, D., & Miller, S. M. (2019). The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries. Journal of Macroeconomics, 60, 33-45.

12, Arab Yarmohammadi, J., & Erfani, A. (2015). The test of money endogeneity in Iran's economy. Monetary Economics, Finance, 23 (11), 122-100. (in persian)

  1. Azizi, F., & Moradkhani, N. (2007). Examining the stock price index on the money demand function. Economic Research Journal, 26, 213-241. (in persian)
  2. Benati, L. (2009). Long Run Evidence on Money Growth and Inflation, European Central Bank, Working Paper Series, NO 1027.
  3. Benchimol, J., & Qureshi, I. (2020). Time-Varying Money Demand and Real Balance Effects, Economic Modelling, 87, 197-211.
  4. Bostani, R., & Komijani, A. (2022). Lessons of money demand stability for monetary policy, Journal of Economic Research. 57(2), 259-284. (in persian).
  5. Boucekkine, M., Laksaci & Touati-Tliba, M. (2021), Long-run stability of money demand and monetary policy: the case of Algeria, Working Papers, Documents de travail.
  6. Diaz-Giménez, J., Glover, A., & Rios-Rull, J. V. (2011). Facts on the Distributions of Earnings, Income, and Wealth in the United States: 2007 Update. Federal Reserve Bank of Minneapolis Quarterly Review 34 (1), 2–31.
  7. Duca, J., & VanHoose, D. (2004). Recent developments in understanding the demand for money, Journal of Economics and Business, 56(4), 247-272.
  8. Erfani, A. Sadeghi, Kh., & Puya, M. M. (2013), Estimating the money demand function in Iran using Divizia index, Economic Modeling Research Quarterly, 13(4), 118-91. (in persian)
  9. Gali, J. (2008). Monetary policy, inflation and business cycle: An introduction to the New Keynesian Framework. Oxfordshire: Princeton University Press.
  10. Gogerdchian, A., Bakhshi D., Rasool & Hashemi F., A. (2015). An approach to Sidraski's money demand in Iran's economy. Economic research and policies, 23(75), 211-230. (in persian).
  11. Hansen, B.E. (1992). Testing for the parameter instability in linear models. Journal of Policy Modeling, 14(4), 517-533.
  12. Kaplan, G., Moll, B., & Violante, G. L. (2018). Monetary Policy According to HANK. American Economic Review, 108(3), 697-743.
  13. Kapounek, S. (2011). Monetary Policy Implementation and Money Demand Instability during the Financial Crisis, Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis. Mendel University Press, 59(7), 177-186.
  14. Lucas, R. E., & Nicolini, J. P. (2015). On the stability of money demand. Journal of Monetary Economics, 73(C), 48-65.
  15. Luo S., Zhou, G., & Zhou, J. (2021). The Impact of Electronic Money on Monetary Policy: Based on DSGE Model Simulations. Mathematics, 9, 2614.
  16. McAdam, P., & Ricardo, J. F. (2012). Anticipation of future consumption: a monetary perspective, Working Paper Series 1448, European Central Bank.
  17. Mendizábal, H. R. (2006). The Behavior of Money Velocity in Low and High Inflation Countries, Journal of Money, Credit and Banking, 38(1), 209-228.
  18. Mubarak, M. S., Benyamin, I. M., Fattah, S., & Uppun, P. (2017). Microfoundation of Money Demand: Household Income Factor Analysis. Int. (Lahore), 29(1), 223-227.
  19. Papademos, L., & Stark, J. (2010). Enhancing monetary analysis, Chapter 3, European Central Bank, ISBN 978-92-899-0319-6.
  20. Sadeghzadeh-Yazdi, A., Jafari Samimi  , & Elmi, Z. (2007). Estimating Demand for Money in Iran Using Autoregressive Distributed Lag Method. Economic Research, 8(29), 1-15. (in persian).
  21. Sargent T.J., & Surico, P. (2012). Two Illustrations of the Quantity Theory of Money: Breakdowns and Revival. American Economic Review, 101(1), 28-109.
  22. Shahrashtani, H., & Sharifi-Ranani H. (2008). Estimating the Money Demand Function and Investigating Its Stability in Iran. Economic Research, 43(2), 89-114. (in persian)
  23. Walsh, C. E. (2010). Monetary Theory and Policy. Third Edition, MIT Press Books, ed. 3.

  • Receive Date 01 July 2022
  • Revise Date 07 March 2023
  • Accept Date 03 April 2023