A Semi-Nonparametric Approach to the Demand for Money in Pakistan

Haroon Sarwar (), Zakir Hussain () and Masood Sarwar ()
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Zakir Hussain: University of Sargodha, Pakistan.
Masood Sarwar: University of Sargodha, Pakistan.
Authors registered in the RePEc Author Service: Masood Sarwar Awan ()

Lahore Journal of Economics, 2011, vol. 16, issue 2, 87-110

Abstract: The degree of substitutability of different monetary assets serves as a valuable source of information for Pakistan’s monetary authorities in the context of money demand analysis. Barnett’s (1980) concept of the micro-foundations of money demand has paved the way for a more comprehensive demand system analysis. Locally flexible functional forms are unable to estimate substitution elasticities at all data points, and thus, we use the asymptotically ideal model, which is a semi-nonparametric globally flexible functional form. Our data on income, price, and substitution elasticities show that there is less-than-perfect substitution among monetary assets. The results of Allan and Morishima elasticities show that the former are inherently biased toward showing monetary assets as complements, making Morishima a better choice. The study recommends that it is high time Pakistan’s monetary authorities abandoned the simple-sum aggregation method, which assumes perfect substitution among monetary assets.

Keywords: Substitution; semi-nonparametric; globally flexible; Morishima elasticity. (search for similar items in EconPapers)
JEL-codes: E41 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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