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Velocity of Money Functions in Pakistan and Lessons for Monetary Policy

Author

Listed:
  • Muhammad Omer

    () (State Bank of Pakistan)

Abstract

This paper is an attempt to contribute to the ongoing debate: should central bank of Pakistan adopt the 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 estimates velocity of money functions and explores their stability in Pakistan. The results show that base and broad money velocities are independent of the interest rate fluctuations. It is also found that velocities of all the three monetary aggregates (i.e., M0, M1, and M2) have stable relationship with their determinants. These findings support the use of monetary aggregates as nominal anchor.

Suggested Citation

  • Muhammad Omer, 2010. "Velocity of Money Functions in Pakistan and Lessons for Monetary Policy," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 6, pages 37-55.
  • Handle: RePEc:sbp:journl:48
    as

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    File URL: http://www.sbp.org.pk/research/bulletin/2010/Vol6No.2/Mahmood&Bilal.pdf
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    More about this item

    Keywords

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

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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