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

References

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Iranian Economic Review
Volume 18, Issue 3 - Serial Number 3
October 2014
Pages 115-132

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