The Demand For Money in Pakistan: Reply (Notes and Comments)

I am grateful to Abe, Fry, Min, Vongvipanond, and Yu (hereafter referred to as AFMVY) [1] for obliging me to reconsider my article [2] on the demand for money in Pakistan. Upon careful examination, I find that the AFMVY results are, in parts, misleading and that, on the whole, they add very little to those provided in my study. Nevertheless, the present exercise as well as the one by AFMVY is useful in that it furnishes us with an opportunity to view some of the fundamental problems involved in an empirical analysis of the demand for money function in Pakistan. Based on their elaborate critique, AFMVY reformulate the two hypotheses—the substitution hypothesis and the complementarity hypothesis— underlying my study and provide us with some alternative estimates of the demand for money in Pakistan. Briefly their results, like those in my study, indicate that income and interest rates are important in determining the demand for money. However, unlike my results, they also suggest that the price variable is a highly significant determinant of the money demand function. Furthermore, while I found only a weak support for the complementarity between money demand and physical capital, the results obtained by AFMVY appear to yield a strong support for that relationship.1 The difference in results is only a natural consequence of alternative specifications of the theory and, therefore, I propose to devote most of this reply to the criticisms raised by AFMVY and the resulting reformulation of the two mypotheses.