The effects of exchange rate volatility on stability of money demand in Pakistan: An ARDL bounds testing approach

  • Niaz Hussain Ghumro PhDAssistant Professor at Sukkur Institute of Business Administration Pakistan
  • Mohd Zaini Abd Karim, Ph.DProfessor, Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia.
  • Manzoor Ali Mirani, PhD Assistant Professor, Institute of Business Administration University, Sukkur

Abstract

This paper attempts to examine the stability of money demand function for Pakistan by including a new variable volatility of exchange rate. A time series annually data for the period 1972-2014 has been used in the estimation of money demand function, employing the ARDL Bounds Testing approach. The results show long-run cointegration among monetary aggregates (M1 and M2) and set of independent variables including exchange rate volatility. The paper further shows long-run effects of exchange rate volatility with only M2 and contributes in its stability rather than M1 in Pakistan. Thus real broad money supply should be considered as policy tool for formulating and implementing monetary policy.


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