Measuring Money Demand Function in selected South Asian Countries
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Date
2014
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UMT,Lahore
Abstract
Money demand has a key position in macroeconomics and monetary economics generally as well particularly. Numerous factors affect money demand and stable money demand function is crucial for implementing the monetary policy. These factors are used for the choice of instruments and transitional targets of economic policy. For statistical inference and analysis of economic policies, there is need for a well specified and stable function of money demand. The well-specified money demand is considered very important in the execution of monetary policy.
The improved economic condition of any country is a sign of increasing money demand and deteriorating economic climate is a sign of decreasing money demand (Maravic and Palic, 2005). Monetarists believe that there is a strong role of government in controlling the amount of money in any economy and the variations in money supply influencing price level in the long run. They also argue that the objectives of monetary policy are best met by targeting money supply.
In this study, we selected Autoregressive distributed lag (ARDL) approach of co-integration in the estimation of money demand function. This approach was developed by Pesaran et al., (2001). We select interest rate, GDP per capita, exchange rate, fiscal deficit, urban and rural population to determine money demand function in selected South Asian countries like Bangladesh, Pakistan and Sri Lanka during 1975-2013.