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

Authors

  • Muhammad Jawad Pakistan Institute of Development Economics
  • Hafsa Hina Pakistan Institute of Development Economics
  • Atiq-Ur-Rehman kashmir Institute of Economics, University of AJ&K

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.

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Published

2022-06-30

How to Cite

Jawad, M., Hina, H., & Atiq-Ur-Rehman. (2022). On Stability of Money Demand Model in Pakistan: A Super Exogeneity Testing Approach Using Indicator Saturation. Pakistan Journal of Economic Studies (PJES), 5(1), 93–133. Retrieved from https://journals.iub.edu.pk/index.php/pjes/article/view/901