Test of the Quantity theory of Money in Iran and Examination of The Effectiveness of Price Stabilizing Policy with GARCH Models

Inflation and its causes are one of the main issues in economics. One of the theories that try to interpret this phenomenon is Quantity Theory of Money. According to this theory, there is pure linear relationship between the amount of liquidity and general level of prices. This article tests the accuracy of this theory in Iran. In addition, the government of Iran has taken the policy of price stabilizing for several years. This article also investigates the effect of this policy on inflation rate. The results show that although the relationship between liquidity and inflation in Iran is not linear, changes in liquidity have a direct effect on inflation. In addition, resultsindicate that there is statistically significant positive relationship betweeninflation uncertainty and inflation rate. So government could control inflationuncertainty through this policy, which in turn lead to decrease in inflation rate.