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.Thpisicestsudnyd ionuvtepsutitganteadmthueltivdyarniaamteicstrruecltautiroenshf icpasbueatlwtyeannamlyosinseyn, 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.
Machine summary:
"5- Estimation Results As noted above, this paper employs a multivariate co-integration analysis and the Granger causality test within the VECM model to analyze causal relationships among these macroeconomic variables in Iran in two periods.
Result of tests in Table 1 shows that for period one (1969-2012), the series: real output( LGDP), money( LM2) and price(LCPI) are integrated of order one I(1), one I(1), and two I(2) respectively, confirming that they are non-stationary at levels, but stationary after first ,first and second differencing respectively.
According to the results of Trace and Max-Eigen value test (tables 3& 4), the null hypothesis of having no co-integrating vector has rejected at the five percent significance level, suggesting that there exists one co-integrating vector and one long run relationship between money supply, price and output for two periods.
Results of estimated VECM model (table 5) signify that there is a long run causal relationship between money supply, output and price in two periods.
Although significant link between money, price and output was illustrated in co- integrated relationship at sub period (1989-2012), results of short run granger causality tests were contrast with them.
Totally, the results of a three-variable vector error correction model (VECM) analysis was indicative for existence of one co-integrated relationship between money supply, price and real output in two period, but Granger-causality and variance decomposition tests didn’t confirm that money supply plays an important role in explaining real output fluctuations in Iran."