Exchange Rate Volatility and Money Demand: An Empirical Analysis of Pakistan

Abstract

The main objective of this study is to investigate the impact of foreign exchange rate volatility on money demand in Pakistan. For this purpose disaggregate expenditure approach use to construct money  demand  function.  For  empirical  estimation  Autoregressive  Distributed  Lag  (ARDL) approach is employed to investigate the co-integration among the money demand, exchange rate volatility, investment expenditure, consumption expenditure, government expenditure and inflation. The long run results show that household’s consumption expenditures, investment expenditure and inflation has positive and significant relationship with money demand in case of Pakistan. On the other hand, the long run results relating to government expenditures and exchange rate volatility show negative and significant impact on money demand.