Determinants of Money Demand in Pakistan: Disaggregated Expenditure Approach

Abstract: The main focus of the study is to find the determinants of money demand in Pakistan. We used disaggregated expenditures approach in this regard. To find the co-integration among the variables of the model, Johansen co-integration approach is utilized. The results of the study show that the co-integration exists among the variables of the model. The long run elasticities of the study reveal that money demand is positively more elastic to investment expenditures, household expenditures and government expenditures respectively. It is less elastic to expenditures on exports and price level in Pakistan. Time trend plays a very significant role in determining the money demand in case of Pakistan. In the short run only one period lagged money demand, investment expenditures and prices are significantly elastic to demand for money. The results of the short run also show the convergence in the long run. Key words: Money Demand Investment Expenditures Household Expenditures Government Expenditures Pakistan INTRODUCTION However, different components of demand The demand and supply side behavior of money for money demand. There may be an aggregation bias in have got much importance since the days of the model, if we use a single variable (aggregate demand) Friedman. Money demand plays a critical role in in the specification of money demand function [11]