Demand for Money and the Black Market Exchange Rate Expectations: Further Empirical Evidence

Abstract

This paper explores the impact of the black market exchange rate expectations on the demand for money in Iran. In the post-revolution era, Iran has imposed a great deal of restriction on the exchange market. The restrictions were so severe that in the period 1979-89, the nation basically was a closed economy. However, as the exchange market restrictions intensified, an active underground exchange market emerged in which key currencies in general and the U.S. dollar in particular, were exchanged several-fold higher than the official rate. The findings suggest that in the sample period 1959-94, demand for real cash balances has been significantly affected by the expected black market exchange rate. Further, the results of a cointegration test provide ample evidence that the apected appreciation/depreciation in the black market exchange rate, real income, and the rate ofinflation jointly detennine the demand for real M2-money in Iran. (E4 I)