Estimating a Function of Real Demand for Money in Pakistan: An Application of Bounds Testing Approach to Cointegration

Abstract

This paper attempts to model a real demand for money function of Pakistan. For this purpose we apply bounds test based cointegration technique using the time series data for the period 1973 to 2010. Our findings included three determinants: 1) real income and 2) foreign exchange contain positive relation as well as for both long run and short run dynamics they are the most significant factors of real demand for money. While we found real demand for money is negatively affected by 3) call money rate (is proxied by interest on deposit). However being in a short-run dynamic specification, money demand is found important with the elasticities of real income, exchange rate and call money rate being much smaller in the short-run than in long-run. Stability tests of the paper do not show any serious structural change in the model. As for both CUSUMSQ and CUSUM statistics, showing the critical value line within the bounds that present the model is stable. This model strongly recommends the real demand for M2 is an important monetary aggregate in terms of policy implications of our results including the suitability of the model in Pakistan. Keywords 1) Real income 2) Foreign exchange rate 3) Call money rate 4) Call money rates 5) Interest rate 6) Autoregressive distributed lag (ARDL) 7) GDP deflator 8)

The Stability of Money Demand Function: Evidence From South Africa

“…After these different theories are carried out, the literature turns to investigate money demand function empirically. Baharumshah et al, 2009;Bahmani-Oskooee and Bohl, 2000;Bahmani-Oskooee and Shabsigh, 1996;Bahmani-Oskooee* and Rehman, 2005;Bhaskara and Singh, 2006;Cheong, 2007;Dreger and Wolters, 2010;Hamdi et al, 2015;Hamori and Hamori, 2008;Kjosevski, 2013;Knell and Stix, 2005;Mall, 2013;Samreth, 2008 are consider both determinant of demand function and its stability. In the African continent, a sufficient number of empirical evidence ware published in particular (Darrat, 1986;Kapingura, 2014;Kumar et al, 2013;Nchor and Adamec, 2016;Tlelima and Turner, 2004).…”

Does Interest Rate Influence Demand for Money? An Empirical Evidence from Ghana

“…On stability, the study reveals that demand for money in Nigeria is stable over the study period. Mall (2013) also examines the function of real demand for money in Pakistan. Annual time series data spanning the period 1973 to 2010 is employed and bounds testing approach to cointegration used.…”

Determinants of Money Demand in Algeria: An Empirical Study Using Cointegration and Error Correction Model

“…Some empirical studies of demand for cash have used variable exchange rates due to its impact on the demand for real cash balances (Augustine & Shwiffm, 1993). In this regard several of studies from 1970 to 2010 have witnessed the relative importance of the variable nominal exchange rates as well as real exchange rate as determinant of money demand models in developing and developed economies (Sober, 2013). It indicated that it would be preferable to include inflation and exchange rates in economies with high inflation rates, and that the exchange rate could measure the expected rate of decline, and thus the opportunity cost of retaining the national currency versus foreign currency (Bahmani-oskooee & Shin, 2002;Akinlo, 2006;Dagher & Kovanen, 2011).…”