Methods of Estimating Equilibrium Velocity of Money and Empirical Volatility Test in Iran (1961- 1998)

There are various ways for estimating velocity of money in economic literature and each has its own specific weaknesses and strengths. Particularly, since a great deal of financial innovations and changes have recently taken place affecting the velocity of money, many traditional methods can no langer calculate the equilibrium velocity of money, and they are no longer dependable from the econometrical analyses viewpoint. Evidently, the fact that velocity of money hypothesis is not satisfied due to various causes has convined some economists that the economic authorities can not depend on monetary variables for influencing the price levels. Long-run equilibrium velocity of money may depend on a function of endogenous variables such as real production, price level, interest rate, financial sector general structure and so on. Hence, today one can not consider the stability hypothesis of the velocity of money as satisfiable in many countries. This paper tries to estimate equilibrium velocity of money in Iran within (1961-1998) through reviewing different methods of money velocity estimation and by the use of advanced econometrical techniques. For this purpose, Iran’s equilibrium vectocity of money was estimated by autoregressive vector values and Hodric-Prescott filtering and as it was expected Iran’s velocity of money was volatile, and foregin exchange rate fluctuations had the most impact on the velocity of money fluctuations.