Investigation of Economic Uncertainty Effect on Money Demand: Case Study of IRAN

In this paper we investigated effect of economic uncertainty on money demand function of IRAN during(1352-1386). At first by using a general equilibrium theory it is shown that in spite of the existence of economic uncertainties, most of agents who are risk-averse consider these uncertainties when constitute their port folio. They consider money demand is a function of income, interest rate and an Econome Uncertainty Index (EUI). In this study, we constituted an EUI by using of ARCH/GARCH models and this index is consist of volatilities of some variables that affect on money demand of IRAN. These variables are: exchange rate, interest rates, inflation, stock market and GDP. After constituting an EUI and entering it in money demand function, we estimated money demand function by ARDL approach. Resultes show that increasing economic uncertainty leades to decreasing money demand in Iran.