Influence of Rise in Volume of Money on Economic Growth in Iran during 1367-1387 (1988-2009)

Of special note is that apart from whether monetary policy, as a monetary instrument, affects real economic variables or not, monetary policymakers use money, despite its neutrality, as an instrument to raise the level of production. This breeds inflation which may in turn influence other economic variables. This study tries to evaluate money neutrality in Iran's economy. Money Neutrality Hypothesis is rooted in Quantity Theory of Money. Neutrality of money is the idea that a change in the stock of money only affects nominal variables such as prices, wages and exchange rate, with no effect on real variables. According to Rational Expectations Hypothesis and flexibility of prices (equilibrium in markets) in macroeconomy, only unanticipated changes of volume of money influence real production. In the phase of model estimation, first the growth rate of money is anticipated using AR4 and ARIMA methods, as well as regression model with the aim of selecting the best model. Later, Two-Stage Least Squares (TSLS) regression is estimated. The period under study covers 1367 through 1387 (1988-2009). Empirical results indicate that anticipated money is neutral while unanticipated money is not (over the short run).