Sectoral Analysis of the Demand for Real Money Balances in Pakistan

The Pakistan Development Review, Vol. 40, No. 4, Part II, pp. 953-966, Winter 2001

15 Pages Posted: 3 Mar 2007

Abstract

Sectoral behaviour of money demand is investigated. It is found that all the series used in the analysis are non-stationary and could not be used without proper transformation. From the cointegration analysis it is concluded that there is long run relationship between the real money demand and its determinants in both sectors. Substantial differences between the determinants and estimated elasticities of two sectors' money holding are revealed. The long run real income elasticity of money by the personal sector is less than what obtained for the business sector's sales elasticity of money demand. Another difference between two sectors is in the interest rates, which appears to have significant effect on the money balances. The business sector seems to have responded the rate of interest on bank advances whereas individuals are more influenced by the long term rates represented by the bond yield. The magnitude of own interest rate elasticity of money balances is another important difference across the sectors. In case of business sector the elasticity is less than one and in case of household it is more than one. It implies that any movement in the rate of interest on deposit have severe consequences for personal sector as compared to the business sector. The rate of inflation is important in the determination of money demand behaviour. The total impact of the rate of inflation on the money demand behaviour of household sector is higher than the business sector, which implies that the household sector substitutes monetary assets with real assets. In the long run real assets substitution is strong across the sectors, though this phenomenon is strong in personal sector. Whereas in the short run change in the rate of inflation has strong affect on aggregate and personal sector and none on the business sector.

Keywords: Money Demand, Household money Demand, Bussiness Money Demand, Cointegration, unit root, Pakistan

Suggested Citation

Qayyum, Abdul, Sectoral Analysis of the Demand for Real Money Balances in Pakistan. The Pakistan Development Review, Vol. 40, No. 4, Part II, pp. 953-966, Winter 2001. Available at SSRN: https://ssrn.com/abstract=967614
No contact information is available for Abdul Qayyum

Register to save articles to
your library

Register

Paper statistics

Downloads
124
Abstract Views
771
rank
229,534
PlumX Metrics