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Sectoral Analysis of the Demand for Real Money Balances in Pakistan


  • Abdul Qayyum

    (Pakistan Institute of Development Economics, Islamabad.)


The main objective of monetary policy in Pakistan, as in other countries, is to achieve price stability. In order to achieve the objective of stable prices, the State Bank of Pakistan is using M2 definition of money supply as an intermediate target variable to conduct the monetary policy. This choice of target variable is based on the long understanding that only the demand for M2 monetary aggregate is stable in Pakistan. The definition of money aggregates two main sectors of the economy that is business sector and household sector. Theories such as quantity theory, Keynesian and transactions, state that both sectors have diversified behaviour. Money demand behaviour of these sectors largely depends on the different sets of variables. Therefore the aggregation of these sectors is rather poor. Further the research conducted in Pakistan mainly concentrated on the estimation of aggregate money demand function by using annual data. Some of the studies, however, used quarterly data. They have estimated money demand functions by disaggregating data on monetary assets basis, particularly M1 and M2. However, relatively thin literature is available on the estimated money demand function by disaggregating business and household sectors. It is argued that money demand behaviour of different sectors of the economy may be different. In this paper the long-run cointegration relationship and the error correction model of the real demand for money in desegregated, business and personal sector, form are estimated by using quarterly data. Then the estimated error correction models are tested for structural break. The empirical importance of the real demand for money in disaggregate form is that it would provide new insight in the conduct of monetary policy in Pakistan

Suggested Citation

  • Abdul Qayyum, 2001. "Sectoral Analysis of the Demand for Real Money Balances in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 953-966.
  • Handle: RePEc:pid:journl:v:40:y:2001:i:4:p:953-966

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    Cited by:

    1. Rana Ejaz Ali Khan & Qazi Muhammad Adnan Hye, 2013. "Financial liberalization and demand for money: a case of Pakistan," Journal of Developing Areas, Tennessee State University, College of Business, vol. 47(2), pages 175-198, July-Dece.
    2. Abdul Qayyum, 2005. "Modelling the Demand for Money in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(3), pages 233-252.
    3. Moses C. Kiptui, 2014. "Some Empirical Evidence on the Stability of Money Demand in Kenya," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 849-858.
    4. Siffat Mushtaq & Abdul Rashid & Abdul Qayyum, 2012. "On the Welfare Cost of Inflation: The Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 51(1), pages 61-96.
    5. Hayat, Zafar & Balli, Faruk & Rehman, Muhammad, 2017. "The relevance and relative robustness of sources of inflation bias in Pakistan," Economic Modelling, Elsevier, vol. 63(C), pages 283-303.

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