Financial Development and Money Demand Function: Cointegration, Causality and Variance Decomposition Analysis for Pakistan

Muhammad Ahad ()

MPRA Paper from University Library of Munich, Germany

Abstract: This study has investigated money demand function incorporating financial development, industrial production, income and exchange rate over the period of 1972-2012 for Pakistan. The newly introduced cointegration approach (Bayer-Hanck combined cointegration) and Johansen cointegration approach have been used to test cointegration among variables. The Vector Error Correction Model (VECM) model has applied to explain the direction of causality in the long run and short run. The Unit root problem has been tested by ADF and PP unit root tests. The results reveal that long run relationship exists between money demand, financial development, income, industrial production and exchange rate. Financial development is the main factor to determine the money demand function in both long and short run. The results indicate that feedback effect is found between financial development and money demand.

Keywords: Financial Development; Money demand; Cointegration; Causality; Pakistan (search for similar items in EconPapers)
JEL-codes: E41 G20 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Financial Development and Money Demand Function: Cointegration, Causality and Variance Decomposition Analysis for Pakistan (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:70033

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