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Stability of money demand function in Pakistan

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  • Omer, Muhammad

Abstract

This paper is an attempt to contribute to the ongoing debate: should central bank of Pakistan adopt inflation targeting or continue with the monetary targeting as a monetary policy strategy? A pre-requisite for monetary targeting strategy is a stable money demand function, which in turn requires stability in velocity. Instability in velocity on the other hand is believed to stem from the volatility of the interest rate. The paper explores the stability of velocity of money in Pakistan. The results show that the base and broad money velocities are independent of the interest rate fluctuations. It is also found that all the three velocities (with respect to M0, M1, and M2) have stable relationship with their determinants. These findings validate use of monetary aggregates as nominal anchor.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35306.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:35306

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Related research

Keywords: monetary targeting; income velocity of money; money demand function;

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  1. Bordo, Michael D & Jonung, Lars & Siklos, Pierre L, 1997. "Institutional Change and the Velocity of Money: A Century of Evidence," Economic Inquiry, Western Economic Association International, vol. 35(4), pages 710-24, October.
  2. Michael D. Bordo & Lars Jonung, 1989. "The Long-Run Behavior of Velocity: The Institutional Approach Revisited," NBER Working Papers 3204, National Bureau of Economic Research, Inc.
  3. Phylaktis, Kate & Taylor, Mark P, 1993. "Money Demand, the Cagan Model and the Inflation Tax: Some Latin American Evidence," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 32-37, February.
  4. Michael D. Bordo & Lars Jonung, 1990. "The long-run behavior of velocity: the institutional approach revisited: introduction," Proceedings, Federal Reserve Bank of Cleveland, pages 165-204.
  5. Faiz Bilquees & Shahnaz Rauf, 1994. "Income Velocity and per Capita Income in Pakistan: 1974-75 to 1991-92," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 33(4), pages 985-995.
  6. Bordo, Michael David & Jonung, Lars, 1981. "The Long Run Behavior of the Income Velocity of Money in Five Advanced Countries, 1870-1975: An Institutional Approach," Economic Inquiry, Western Economic Association International, vol. 19(1), pages 96-116, January.
  7. Saqib, Omar F & Omer, Muhamad, 2008. "Monetary Targeting in Pakistan: A Skeptical Note," MPRA Paper 14883, University Library of Munich, Germany.
  8. Asano, Hirokatsu, 1999. "Financial Deregulation and Stability of Money Demand: The Australian Case," Australian Economic Papers, Wiley Blackwell, vol. 38(4), pages 407-21, December.
  9. Bahmani-Oskooee, Mohsen & Bohl, Martin T., 2000. "German monetary unification and the stability of the German M3 money demand function," Economics Letters, Elsevier, vol. 66(2), pages 203-208, February.
  10. Arango, Sebastian & Ishaq Nadiri, M., 1981. "Demand for money in open economies," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 69-83.
  11. Akinlo, A. Enisan, 2006. "The stability of money demand in Nigeria: An autoregressive distributed lag approach," Journal of Policy Modeling, Elsevier, vol. 28(4), pages 445-452, May.
  12. Paresh Kumar Narayan, 2008. "Revisiting the US money demand function: an application of the Lagrange multiplier structural break unit root test and the bounds test for a long-run relationship," Applied Economics, Taylor & Francis Journals, vol. 40(7), pages 897-904.
  13. Bahmani-Oskooee, Mohsen, 2001. "How stable is M2 money demand function in Japan?," Japan and the World Economy, Elsevier, vol. 13(4), pages 455-461, December.
  14. Frenkel, Jacob A. & Taylor, Mark P., 1993. "Money demand and inflation in Yugoslavia 1980-1989," Journal of Macroeconomics, Elsevier, vol. 15(3), pages 455-481.
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