Title: Exchange rate volatility and demand for money in Iran
Authors: Sahar Bahmani; Mohsen Bahmani-Oskooee
Department of Economics, University of Wisconsin-Parkside, Kenosha, WI 53141, USA
Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, Wisconsin 53201, USA
Abstract: In 1963, Nobel Laureate, Robert Mundell (1963) argued that the demand for money could depend on the exchange rate, in addition to income and interest rate. In this paper, we argue that, in addition to the exchange rate itself, its volatility could also serve as another determinant of the demand for money. We demonstrate our conjecture by using data from post-revolutionary Iran and the bounds testing approach. Our results reveal that indeed, exchange rate volatility has short-run as well as long-run effects on the demand for real M2 monetary aggregate in Iran.
Keywords: money demand; exchange rate volatility; bounds testing; Iran.
Int. J. of Monetary Economics and Finance, 2012 Vol.5, No.3, pp.268 - 276
Submission date: 13 May 2011
Date of acceptance: 03 Oct 2011
Available online: 11 Sep 2012