Revisiting Determinants of Money Demand Function in Pakistan

Abstract. This study investigates the factors such as interest rate, GDP per capita, exchange rate, fiscal deficit, urban and rural population to determine money demand function for Pakistan over the period from 1972-2013. We use ARDL Bound Testing approach in order to test long run relation between money demand and its factors whereas both long and short run coefficients will be found using similar approach. The results show that real interest rate exerts significant and negative effect upon money demand in both long and short run in Pakistan. The results also disclose that exchange rate and rural population are leaving significant but negative effect on the demand for money. These findings are robust to different diagnostic tests..Keywords. Pakistan, Money Demand, Interest Rate, Per Capita GDP, Fiscal Deficit and Exchange Rate.JEL. E40, E41, E50