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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.

Suggested Citation

  • Omer, Muhammad, 2009. "Stability of money demand function in Pakistan," MPRA Paper 35306, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:35306
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Adnan Haider & Asad Jan & Kalim Hyder, 2013. "On the (Ir)Relevance of Monetary Aggregate Targeting in Pakistan: An Eclectic View," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 65-119, July-Dec.
    2. repec:sae:globus:v:18:y:2017:i:4:p:811-824 is not listed on IDEAS
    3. Bhatta, Siddha Raj, 2011. "Stability of demand for money function in Nepal: A cointegration and error correction modeling approach," MPRA Paper 41404, University Library of Munich, Germany.
    4. Muhammad Ahad, 2017. "Financial Development and Money Demand Function: Cointegration, Causality and Variance Decomposition Analysis for Pakistan," Global Business Review, International Management Institute, vol. 18(4), pages 811-824, August.

    More about this item

    Keywords

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

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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