The Search for a Stable Money Demand Function for Pakistan: An Application of the Method of Cointegration

Despite an impressive number of studies on money demand in Pakistan since the early 1970s, the question of stability of the money demand function did not receive much attention. This paper examines the question of whether there exists a stable money demand function in Pakistan. The novelty of the study comes from the application of the method of cointegration to Pakistani annual data over 1951-91.1 The empirical findings of this study are somewhat different from those of earlier studies on money demand in Pakistan and have monetary policy implications. However, besides some inherent shortcomings of the method of cointegration, one possible weakness of the paper is the use of data which extend over the 1950s and 1960s when Bangladesh was a part of Pakistan. It creates an unavoidable problem of data conformability. It induced me to take the risk of being somewhat complacent about the sample size as I report empirical results for a shorter sample period 1972-91. One consolation is that empirical findings for this sub-sample appear qualitatively better than those obtained for the full sample period.