Modeling money demand under the profit-sharing banking scheme: Some evidence on policy invariance and long-run stability

This paper extends the literature on profit-sharing banking systems by modeling money demand behavior in Iran. We estimate demand for M1 and profit-sharing deposits over the period 1966-2001. We focus on whether the estimated money demand equations are policy invariant in addition to being temporally stable in the short and long run. Our empirical results persistently suggest that the demand equation for profit-sharing deposits is particularly stable and policy invariant in Iran despite numerous policy and non-policy shocks. These results lend support to the profit-sharing banking system and suggest that profit-sharing monetary aggregates are a credible instrument for monetary policy-making.