Abstract

Monetary policy is one of the main instruments used by government for obtaining macro-economic goals. Increasing the level of output and employment is the main purpose of Expansionary monetary policy. In this paper, we examine the short-run and long-run effects of money (M2) on inflation and GDP in Iran with four variable vector error correction model. We use quarterly data between 1988Q1 and 2005Q4. Results of estimation indicate that in the short-run M2 has no acceptable effect on output and inflation but in long-run excess supply of money lead to inflation. Impulse response functions imply that effects of money shock remain for 2.5 years but inflation fluctuation is more than one output.

Key words: Vector-error-correction-model, money, co integration.