Factors Affecting Demand For Real Money And International Capital Movement In Pakistan: An Analysis

The concept of monetary policy is based on the money demand function; therefore, to shed light on Pakistan's monetary policy, this study investigates the factors that influence demand for real money in the country. The data for this research have been taken from world indicators for the period of 1960-2016. The present research examines the influence of real returns and down grading of domestic money in Pakistan. Nevertheless, the demand for real money is highly influenced by the international interest rate. The rejection or acceptance of the log form is based on the non-linearity test. This test shows acceptance of the simple log form at the 1% level. Moreover, the normality and stability of the model in Pakistan are verified by the ARCH, LM, cumulative sum (CUSUM and CUSUMSQ) tests. Furthermore, the ARDL approach is used to find associations between the dependent variables and regressors. The findings show that there is a long-run relationship between money demand and the regressors.