Estimation of the Demand for Money in Iran

Abstract

Recent studies of monetary demand indicate that simple sum measurement of monetary aggregates in money demand is invalid; unless the monetary components of aggregates are perfect substitutes. Thus all predictions of monetary policies based on simple sum method of aggregation should be reevaluated. This paper focuses on the demand for money in Iran and utilizes the demand systems approach in the context of locally Flexible Functional Forms – the Generalized Leontief (GL). It also pays explicit attention to the theoretical regularity conditions of positivity, monotonicity and curvature. Without satisfaction of all these theoretical regularity conditions, the resulting inferences are worthless. The resulting estimates indicate that the Morishima elasticities of substitution between demand deposits and time deposits are less than unity, which indicates a low elasticities of substitution among these two monetary components.