Abstract:
In this paper we investigate both the long and short-run
relationship between real money balances, real income, inflation rate,
foreign interest rate and real effective exchange rate with reference to
Pakistan over the period 1982Q2-2002Q4 using ARDL approach which is a
newly developed econometric technique. The estimated results indicate that
in the long-run real income, inflation rate, foreign interest rate and real
effective exchange rate have a significant impact on real money balances in
Pakistan. The dynamics of real money demand show that the effects of rate
of inflation, foreign interest rate and the real effective exchange rate are
much smaller in the short run than long run. The results also reveal that
the demand for real money balances in Pakistan is stable, despite the
economic reforms pursued by the government since the late 1980s.
