Stability of money demand in Pakistan: the impact of exchange rate, remittances, and financial liberalization
Understanding the demand for money in an economy is an important prerequisite for formulating and conducting monetary policy. Several macroeconomic variables influence the money demand. Pakistan has undergone significant changes in the macroeconomic landscape over the years such as exchange rate cha...
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| Format: | Thesis |
| Language: | English English |
| Published: |
2016
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| Subjects: | |
| Online Access: | http://etd.uum.edu.my/6334/ |
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| Summary: | Understanding the demand for money in an economy is an important prerequisite for formulating and conducting monetary policy. Several macroeconomic variables influence the money demand. Pakistan has undergone significant changes in the macroeconomic landscape over the years such as exchange rate changes with its volatility, remittances, and financial liberalization. Such changes in the economy might have caused shifts in the parameters of the money demand function over time, making the function unreliable for policy decisions. It is therefore necessary to investigate money demand function in the Pakistan, including exchange rate with its volatility, remittances, and financial liberalization in order to capture their long-run and short-run effects. Using Autoregressive Distributed Lag (ARDL) Bounds Testing Approach, this study sought to examine the relationship between demand for money and exchange rate with its volatility, remittances and the pace of financial liberalization in Pakistan using data from 1972 to 2014. Empirical results of the study reveal that exchange rate and its volatility support the wealth effect hypothesis, and uncertainty in the exchange rate drives more holding of the domestic currency. The positive and inelastic coefficient of remittances show the increasing patterns of consumption among the households and revealing inefficiency of regular channels of remittances in Pakistan. Financial liberalization increases money demand and its small coefficient reveals that the pace of financial liberalization is still growing. Finally, this thesis examines the stability of both models for policy implementation. The results reveal that only model for real narrow money demand is stable. Thus, the policy makers should consider real narrow money demand as a policy tool in Pakistan |
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