Short-run Money Demand and Supply Relations in Pakistan

Financial variables are known to be highly volatile. Values of many financial variables change swiftly as well as frequently. For policy-makers it pays then to know which shifts can be considered to be part of a normal pattern – which do not have to raise concern – and which other shifts may therefore be regarded as abnormal and which may need to be examined more closely, possibly in preparation of appropriate policy measures. The present article presents results of statistical tests of money demand and supply relations using monthly instead of the usual annual data. The tests provide among others an indication of the variables contributing to the explanation of monthly variations in money supply and demand and of the time lags involved in the transmission of the impact. The relations also describe the seasonal pattern in money use. The presentation is organized as follows. In the next section a selection of monthly money-demand relations is presented and discussed. Thereafter, in Section 3, follow money-supply relations. Having these sets of equations available the obvious next step is to test the ability of the monetary approach in explaining monthly price variations, The results are given in Section 4. Finally, Section 5 summarizes the conclusions.