Estimating and Forecasting Demand for Broad Money in Iran through Cointegration Analysis and Stochastic Simulation

This study estimates the demand for broad money in Iran through multivariate Cointegration analysis as proposed by Johansen and Juselius and tests the validity of the estimated model through forecasting money demand for several periods Using stochastic simulation technique. The study obtained one unique cointegrated long run relationship among the logarithmic forms of Broad Money, National Income, Exchange Rate, Price Index and Oil Prices. After identification of exogenous variables, system of equation was designed and estimated by OLS method. Model was solved by considering two scenarios: Baseline and Scenariol.In the Baseline the variables were considered endogenous and in the Scenario 1, Price Index and Oil Price were regarded as exogenous. This model was solved with stochastic simulation approach and give dynamic forecast of the variables. The results show that there is trivial difference between actual values and amount forecasted under Scenario1. On the other hand, forecasted amounts by Baseline scenario have relatively substantial deviations from the actual outcomes, though they do seem to follow the general trends in the data very well.