On Stability of Money Demand Model in Pakistan: A Super Exogeneity Testing Approach Using Indicator Saturation

Abstract

The study attempts to test the stability of the money demand (M2) model in the case of Pakistan under the shade of super exogeneity testing procedure with an amalgamation of recently developed techniques of selecting breaks or location shifts (data driven) using Indicator Saturation like; Impulse Indicator Saturation (IIS), Step Indicator Saturation (SIS) and Trend Indicator Saturation (TIS). The estimated Vector Error Correction Model (VECM) of money demand (M2) with Real Income, Inflation Rate, short and long term interest rates, Financial Innovation and Financial Development; reveals that the parsimonious model is structurally invariant and remains super exogenous to the relevant class of interventions for parameters of interest during the stipulated period (1972-2018) in Pakistan and hence can be used for policy purposes. Consequently, Lucas critique refuted in the case of Pakistan.