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Currency Substitution, Capital Mobility and Functional Forms of Money Demand in Pakistan

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  • Yu Hsing

    ()
    (Charles Blackwell Endowed Professor of Economics, Department of General Business, SLU 10813, College of Business, Southeastern Louisiana University, Hammond, Louisiana 70402, USA.)

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    Abstract

    The demand for M2 in Pakistan ispositively influenced by real GDP and currency appreciation and negatively influenced by the domestic interest rate and the foreign interest rate. These results confirm international capital mobility and currency substitution. The Box-Cox transformation indicates that the log-linear function cannot be rejected while the linear function can be rejected at the 5% significance level. The log-linear form of the demand for M2 shows a small value of the mean absolute percent error and performs better in the CUSUM and CUSUMSQ tests than the linear form.

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    Bibliographic Info

    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 12 (2007)
    Issue (Month): 1 (Jan-Jun)
    Pages: 35-48

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    Handle: RePEc:lje:journl:v:12:y:2007:i:1:p:35-48

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    Keywords: Currency substitution; capital mobility; Box-Cox model; CUSUM and CUSUMSQ tests;

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    1. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
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    3. Gordon, Robert J, 1984. "The Short-Run Demand for Money: A Reconsideration," CEPR Discussion Papers 24, C.E.P.R. Discussion Papers.
    4. David H. Small & Richard D. Porter, 1989. "Understanding the behavior of M2 and V2," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 244-254.
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    17. Marquez, Jaime, 1987. "Money demand in open economies: A currency substitution model for Venezuela," Journal of International Money and Finance, Elsevier, vol. 6(2), pages 167-178, June.
    18. Duca, John V, 2000. "Financial Technology Shocks and the Case of the Missing M2," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 820-39, November.
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