Survey of Money- Output Causality: Case Study of Iran, Based on Vector Error Correction Model (VECM)

Document Type: Research Paper

Authors

1 Ph.D. in Economics, Monetary and Banking Research Institute (MBRI), Tehran, Iran

2 Ph.D. Candidate, School of Computer Science, Engineering and Mathematics, Flinders University, Australia.

Abstract

This study investigated the dynamic relationship between money, prices and output in a multivariate structure of casualty analysis in Iran for the two period of 1969 to 2012 (entire period) and 1989 to 2012 (sub-period). This statistical framework has been projected for situations where causal links may have changed over the sample period. Results of a three-variable Vector Error Correction Model (VECM) analysis were indicative for existence of one co-integrated relationship between money supply, price and real output at both periods. Although there was a long run relationship between money, output and prices for both periods, direction of casualty has changed for sub-period. Also error correction terms showed that short run adjustment toward long run equilibrium was faster and stranger at sub-period, when Central Bank of Iran (CBI) adopted expansionary monetary policy and consequently rapid increase in liquidity. Finally money- output causality was not confirmed in this method and presence of correlation (not causality) between variables may just resulted from some other variables in economy as source of changes.

Keywords


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