Probing the Nature of Pakistan’s Money Supply: Using Co-integration Analysis and Error Correction Mechanism

Historic development of monetary economics encompasses two different school of thoughts on functioning of central banks in management of money supply and the level of economic activities, indirectly. “Monetarists” argue that “Money supply is exogenously determined” while “Post Keynesians” claim endogenously determined nature of money supply. In order to explore the real scenario of endogenous nature of money supply, there is a dire need of empirical studies covering different economies at different stages of development. the present study was planned to examine nature of money supply in Pakistan. study period covered a span ranging from 1995 to 2019 and Semi-annual data is used for analysis. Three hypothesis are tested in this study. i.e. accomodationists view, structuralists view and liquidity preference view. variables of the study comprised of monetary base, bank credit, money multiplier, M2 money supply and money income. Co-integration and error correction mechanism (ECM) were applied for determining long run relationships and short run deviations. results revealed that structuralists and liquidity preference view both hold true in case of Pakistan. Liquidity preference view holds true completely; whereas structuralists view was partially supported by the results of our study. &nbsp