Is Money Really Neutral in Iran?

Money neutrality has been the focus of numerous studies in recent decades. There are a great deal of findings about the way monetary policies impress real sectors, though there is not a clear undrestanding about the final effects of this variable. this study is devoted to examine the long run relationship between real GDP, money outside and inside money), consumer price index, and exchange rate (within the period of 1959-2002), using econometric methods such as TS (Two Stage), Engle Granger, Autoregressive Distributed Lag (ARDL), Johanson-Joselios co-integration and HEGY tests. The results show that both inside and outside money have approximately the same but mirror-like effect on real production. They are also able to explain 0.25 and 0.33 percent of GDP Variations, respectively. However exchange rate's role in this regard is about 16 percent. This analysis has doe by using ARDL method shows that the elasticity of GDP to changes in inside and outside money is 0.403 and -0.395 respectively. In other words the impact of these two variables on GDP is the same but mirror-like. Finally the results of Seasonal co-integration and HEGY test defines no co-integration among inside money, outside money and GDP but a non spurious relation among inside money, outside money and CPI. Thus the hypothesis of money neutrally is accepted in Iran's economy, and also it becames clear that the exchange rate is one of those important variables affecting production in the long run. What can be recommended here is that monetary authorities can apply monetary policies for deflator goals, as production level is not affected by changes in money supply.