Measuring the Money Demand in Pakistan: A Time Series Analysis

This study has explored the factor impacting money demand in the case of Pakistan from 1980 to 2019. Broad Money is taken as the dependent variable, consumption of the household, consumption of government, interest rate, consumer price index, population growth, and remittances are selected independent variables. Augmented Dickey-fuller (ADF) and Phillip Perron (PP) unit root tests are used for examining the stationary of the variables. ARDL method is used for finding the cointegration among the variables of the model. Granger Causality test is used for examining the causal relationship among variables. The results of this study show that there is mixed order of integration among variables of the model. The estimated results of the study show that socio-economic factors play an important role in determining the money demand in Pakistan. So, socio-economic factors play an important role in determining money demand in the case of Pakistan. equilibrium. Dagher and Kovanen (2011) investigated the impact of money demand on the economy in the case of Ghana. For this analysis, they use time-series data from Ghana Statistics Services. For empirical analysis unit root, ADF, and co-integration ARDL tests are used. This study suggests that in Ghana money demand stability is converging in the long run. The results confirm that money demand has an important effect on all sectors of the economy. Suliman and Dafaalla (2011) observe the demand for money function in Sudan for the duration of 1960-2010. ARDL cointegration technique is applied for the long-run association between variables. Annual data is collected from the Central bank of Sudan. The estimated long-run results show all the selected variables have significant relation with dependent variables. Inflation and exchange rate have an undesirable effect on money demand and people demand substitution assets. In Sudan, narrow money demand is used for monetary policy analysis. Anwar and Asghar (2012) investigate the factors of money demand which are helpful for effective monetary and stabilization policies in Pakistan. This study uses annual data from World Bank Indicators and State Bank of Pakistan from 1975 to 2009. For empirical analysis, Auto-Regressive Distributed Lag (ARDL) is used. ADF and PP techniques are applied for examining the stationary of the variables. Results indicate that the long-run relationship with real money balance (M1) is unstable and real money balance (M2) is stable for policymaking. The inflation rate and exchange rate coefficients are negative and significant. Income elasticity has a positive and significant effect on both real money balance M1 and M2. M2 real monetary has a negative and significant association with inflation but insignificant in the case of the exchange rate. Arize and Nam (2012) examine the connection between exchange rate and money demand for 1973-2007 for seven countries. The results show that the exchange rate has constructive relation with demand for money while the domestic interest rate hurts money demand in all seven countries. The study concludes that broad money (M2) is needed by monetary authorities for achieving valuable goals. Chaudhry et al., (2012) apply the co-integration and Granger Causality technique to estimate the impression of monetary policy and inflation on economic progress in the case of Pakistan. This study analyses time series data from 1972-2010 which is examine the money demand and money supply function from 1961-2013 in the case of Pakistan. The two-stage least square (2SLS) technique is employed for empirical analysis. Data are assembled from IFS and WDI. The results showed that there is a direct attachment between money demand and output. Demand for money is adversely linked to the rate of interest and exchange rate. Money supply illustrated that it has a negative relationship with inflation and GDP but it has a positive relationship with the rate of interest. Malumisa (2015) reports that structural break in 1994 has a significant role on money demand stability function in South Africa. He tests a narrow and broad money demand model in South Africa using World Bank and national Reserve Bank dataset for 1970 to 2013. By comparing the post and prior period of breaks Gregory Hansen's test finds that broad money demand function is not affected by these breaks. The study suggests that there is a need for liberalization of monetary policies and floating exchange rate policy in the case of South Africa.