Stability of Money Demand Function in Pakistan

Muhammad Omer

No 36, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: This paper is an attempt to contribute to the ongoing debate: should central bank of Pakistan adopt inflation targeting or continue with the monetary targeting as a monetary policy strategy? A pre-requisite for monetary targeting strategy is a stable money demand function, which in turn requires stability in velocity. Instability in velocity on the other hand is believed to stem from the volatility of the interest rate. The paper explores the stability of velocity of money in Pakistan. The results show that the base and broad money velocities are independent of the interest rate fluctuations. It is also found that all the three velocities (with respect to M0, M1, and M2) have stable relationship with their determinants. These findings validate use of monetary aggregates as nominal anchor.

Keywords: Monetary targeting; income velocity of money; money demand function (search for similar items in EconPapers)
JEL-codes: E12 E5 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2010-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Stability of money demand function in Pakistan (2009)
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