Abstract—This study examines the long run equilibrium relationship between the demand for loans and deposits and M1 and M2 with rate of profit on bank deposit (interest rate) in the Iran using the Cointegration technique. In addition, the study investigates both the short run dynamics and the direction of the causality in the long and short run between the demand for loans and deposits in order to test the endogeneity/ exogeneity of money supply utilizing the vector error correction model (VECM) technique.
The Cointegration test indicate s the existence of long run equilibrium between loans and de posits and M1 and M2 with rate of profit on bank deposit(interest rate). The causality tests indicate that there is a unidirectional causal relationship from loans to deposits in the long but not in the short run. This result indicates that money supply is endogenous since interest rate elasticity is highly significant and the demand for credit does create money. also, one may conclude that money supply is mostly not under the control of the Central Bank of the Iran.
Index Terms—Endogenousmoney, cointegration technique, interest rate elasticity, causality tests.
J. Haghighat is with Associate Professor of Economics and Director of Research Affairs Department at University of Tabriz, Iran (e-mail:firstname.lastname@example.org; Jafarhaghighat@ yahoo.com).
Cite: J. Haghighat , "The Endogenous Money In Iran: What it is and Why it Matters," International Journal of Trade, Economics and Finance vol. 3, no. 2, pp. 82-84, 2012.