Role Of Money Demand In Monetary Policy

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Money demand plays a crucial role in monetary policy formulation. Over the last decade, the financial background of Pakistan has undergone major changes. In Pakistan monetary policy has not been formulated in the light of predictable money demand. In spite of all of this money demand function is of central importance in the conduct of monetary policy because efficiency of monetary policy depends upon the estimation of money demand function without reliable estimation of money demand function optimal monetary policy could not be constructed. Conducting a successful monetary policy we must knowledge about those factors which affect the money demand function. The stable and managed money demand function is required for policy analysis and forecasting…show more content…
According to Friedman 1956, there exist a stable long run relation among real income, real money balance and the cost of holding money. Many researcher in Pakistan have been estimated the money demand function with co-integration techniques Akhtar, 1974; Mangla, 1979; Khan, 1980; Qayyum, 1998, 2005 and Zakir, 2006. In these studies real GDP or real GNP is used in a single determine of aggregate demand erratic. So that, different components of demand have different impact for money demand. If we use only variable in the requirement of money demand function then we have to used consumption expenditure, investment expenditure, government expenditure and export by disaggregating the aggregate demand (real income). We can also include inflation in the model to find out a reliable association among money demand and expenditure…show more content…
David Hume (1970) investigated how monetary policy ought to facilitate for smoothing output of an economy. He observed that raise in the supply of money privileged industrial output. Rise in the price of one good sets a point of new prices for each goods. While a result new kind of good as well introduced in the market. Lucas (1972) presented a whole depiction of the behavior on which money injects in the economic activity of an economy. At the same time Walrasian auctioneer, he clarified that money works as a market clearing instrument. Lucas pointed out even though workers are alert about the shape and form of their expectations but they reacted optimistically to their nominal wages. Workers also obtain this increase as real and increase their supply of labor more than the price of those goods they buy. If we see the monetary policy circumstance of both developed and under developed countries, we find that money demand has important allegations. M2 plays an effective role in policy target variable in macroeconomic, variables like real interest rate and economic activity. Current flow in inflation in Pakistan given that previous link of years and stories of successes through inflation targeting in different countries have transformed in the argue on the monetary targeting policy followed by SBP. Numbers of authors have argued for and disagree the implementation

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