The impact of symmetric and asymmetric exchange rate fluctuations on demand for money in Pakistan

Abdul Hannan and Tahira Ishaq

Journal of the Asia Pacific Economy, 2023, vol. 28, issue 1, 261-283

Abstract: A growing body of recent literature identifies the exchange rate as an important determinant of demand for money along with income and interest rate, but these studies assume the symmetric effect of exchange rate on demand for money. In contrast, this study argues that the exchange rate can have an asymmetric effect on money demand. Therefore, we estimate the symmetric and asymmetric impact of real effective exchange rate on demand for money from 1974 to 2019 for Pakistan using the symmetric and asymmetric autoregressive distributed lag model (ARDL). The estimated symmetric ARDL model shows insignificant impact of the real effective exchange rate on demand for money while the asymmetric ARDL results show that the impact of currency depreciation on money demand is positive and significant, suggesting substitution effect. Moreover, the stability of the money demand function highlights the role of monetary aggregates in the conduct of monetary policy.

Date: 2023
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DOI: 10.1080/13547860.2021.1880040

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