An Empirical Investigation of the Quantity Theory of Money in Pakistan

Authors

  • Faisal Kamal Department of Economics, Kohat University of Science and Technology, Kohat, Pakistan Author
  • Ihtisham ul Haq Department of Economics, Kohat University of Science and Technology, Kohat, Pakistan Author
  • Dilawar Khan Department of Economics, Kohat University of Science and Technology, Kohat, Pakistan Author
  • Hameed Gul Department of Economics, Kohat University of Science and Technology, Kohat, Pakistan Author

DOI:

https://doi.org/10.61506/01.00182

Keywords:

money supply, price level, interest rate, output

Abstract

One of the macroeconomic objective is to have price stability. The quantity theory of money (QTM) explains the nexus between money supply and price level in the economy thus, QTM provides the theoretical framework for monetary policy to bring price stability. Therfore, this study investigates the validity of QTM in Pakistan in time series study. This study applied different econometric techniques, unit root tests, cointegration test, and  fully modified ordinary least square (FMOLS) cointegration regression. The variables money supply, price level, interest rate and output are cointegrated in the long run. The results of the FMOLS regression indicate positive and significant effect of money supply on price level henceforth; this study validate the QTM in Pakistan. The study suggests that monetary policy can effectively control the price level in the economy to maintain economic stability and sustain economic growth.

References

Akeerebari, T. J. (2022). Effect of Insufficient Currency in Circulation on the Rate of Inflation and Unemployment in Nigeria: The Buhari’s Administration Experience. American Journal of Economics, 6(1), 25-47. DOI: https://doi.org/10.47672/aje.887

Avdiu, K., & Unger, S. (2022). Predicting inflation—A holistic approach. Journal of Risk and Financial Management, 15(4), 151. DOI: https://doi.org/10.3390/jrfm15040151

Bhowmik, D. (2020). Empirical evidence of quantity theory of money in the UK. Journal of International Money, Banking and Finance, 1(1), 31-54.

Bilgrami, S. R., & Maryam, S. R. (2022). Determinants of inflation in Pakistan, India, Bangladesh, and Sri Lanka: A panel data analysis. Journal of Human Behavior and Societies, 1(1), 1-9.

Bodin, Jean. (1566). Response to the Paradoxes of Malestroit. Translated by Henry Tudor. Bristol: Thoemmes Continnum (1997). Online available at: https://cir.nii.ac.jp/crid/1130282271519951232.

Bojanic, A. N. (2021). A Markov-switching model of inflation in Bolivia. Economies, 9(1), 37. DOI: https://doi.org/10.3390/economies9010037

Brunner K., Meltzer A. H. (1963), ‘The place of Financial intermediaries in the transmission of monetary policy’, American Economic Review, 53(2), 372-382.

Chang, D. M. (2021). Forecasting US GDP: assessing the quantity theory of money as a device. Online available at: https://soar.suny.edu/handle/20.500.12648/7032.

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427-431. DOI: https://doi.org/10.1080/01621459.1979.10482531

ESP (2022). Economic Survey of Pakistan. Online available at: https://www.finance.gov.pk/survey_2022.html.

Farooq, O., Hassan, Q. S. U., & Shahid, M. (2015). The Applicability of Quantity Theory of Money in Case of Pakistan: A Time Series Analysis. Journal of Economics and Sustainable Development, 6(3), 157-166.

Fisher I. (1911), The Purchasing Power of Money, New York: Macmillan. Online available at: https://www.jstor.org/stable/2965060.

Friedman M. (1968), ‘The Role of Monetary Policy’, American Economic Review, 58(1), 1‐17.

Gatawa, N. M., Abdulgafar, A., & Olarinde, M. O. (2017). Impact of money supply and inflation on economic growth in Nigeria (1973-2013). IOSR Journal of Economics and Finance (IOSR-JEF), 8(3), 26-37. DOI: https://doi.org/10.9790/5933-0803042637

Hassan, S. S., & Teleb, M. A. (2022). Money Supply Behavior in Egypt (2004-2019). MONEY, 5(1), 59-74. DOI: https://doi.org/10.52589/AJESD-4VEYYPJE

Hume D. (1752). ‘Of interest; of money’, in Essays, Moral, Political and Literary, Vol. 1 of Essays and Treatises, a new edn, Edinburgh: Bell and Bradfute, Cadell, and Davies, 1804.

Inim, V., Samuel, U. E., & Prince, A. I. (2020). Other determinants of inflation in Nigeria. European Journal of Sustainable Development, 9(2), 338-338. DOI: https://doi.org/10.14207/ejsd.2020.v9n2p338

Lee, C. W., & Huruta, A. D. (2021). Reexamining The Quantity Theory Of Money: An Empirical Analysis From The Joint Hypothesis. Economic Review, 19(1), 3-12. DOI: https://doi.org/10.51558/2303-680X.2021.19.1.3

Locke J. (1692), Consequences of the Lowering of Interest and Raising the Value of Money. Online available at: https://quod.lib.umich.edu/e/eebo/A48895.0001.001?view=toc.

Mala, C. M. F., Sofyan, J. F., Adhikara, M. F. A., & Jumono, S. (2021). The Relationship Between Banking Intermediation And Real Economic Growth (A Case Study Of Indonesia For The Period 2007–2019). Journal of Southwest Jiaotong University, 56(6), 113-121. DOI: https://doi.org/10.35741/issn.0258-2724.56.6.48

Matres, J. D. O. G., & Le, T. V. (2021). The Impact of Money Supply on the Economy: A Panel Study on Selected Countries. Journal of Economic Science Research, 4(4), 122-136. DOI: https://doi.org/10.30564/jesr.v4i4.3782

Mises L. V. (1912), Theorie des Geldes und der Umlaufsmittel, Munich and Leipzig. Online available at: https://elibrary.duncker-humblot.com/9783428518821.

Mohamed, E. S. E. (2020). Velocity of Money Income and Economic Growth in Sudan: Cointegration and Error Correction Analysis. International Journal of Economics and Financial Issues, 10(2), 87. DOI: https://doi.org/10.32479/ijefi.8944

Muhammad, A., Chani, M. I., & Ali, A. (2013). Determinants of Money Demand in Pakistan: Disaggregated Expenditure Approach. World Applied Sciences Journal, 24(6), 765-771.

Okoroafor, David.O.K., Adeniji and Olasehinde (2018). Estimating and Forecasting the Impact of Inflation on Economic Growth in Nigeria Using Threshold Analysis, CBN Journal of Applied Statistics, 9(1), 312- 328.

Phillips, P. C., & Hansen, B. E. (1990). Statistical inference in instrumental variables regression with I (1) processes. The Review of Economic Studies, 57(1), 99-125. DOI: https://doi.org/10.2307/2297545

Pigou, A.C. (1917). The Value of Money. Quarterly Journal of Economics, 32(1), 38-65. DOI: https://doi.org/10.2307/1885078

Pinter, J. (2022). Monetarist arithmetic at COVID‐19 time: A take on how not to misapply the quantity theory of money. Economic Notes, 51(2), e12200. DOI: https://doi.org/10.1111/ecno.12200

Regret, S., & Simbisai, M. B. (2020). Testing the Quantity Theory of Money in Zimbabwe under the Multiple Currency Regime: An ARDL Bound Testing Approach. African Journal of Economic Review, 8(1), 65-88.

Roussel, Y., Ali, A., & Audi, M. (2021). Measuring the money demand in Pakistan: a time series analysis. Bulletin of Business and Economics (BBE), 10(1), 27-41.

SBP (2022). Annual reports of the State Bank of Pakistan. Online available at: https://www.sbp.org.pk/reports/annual/index.htm.

Stewart, K. G. (2021). The Simple Macroeconometrics of the Quantity Theory and the Welfare Cost of Inflation. manuscript, University of Victoria, Victoria, BC. Online available at: web.uvic.ca/~kstewart/StewartQTM.pdf.s

Thornton, Henry. (1802). An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. New York. Online available at: https://books.google.com.pk/books?hl=en&lr=&id=lXREAAAAcAAJ&oi=fnd&pg=PA48&ots=U1C-PFdX5F&sig=OzGqaQIOWOb4b1h_LFdeJtvZ2Wc&redir_esc=y.

Wang, H. (2020). The Quantity Theory of Money and the Specification of Long-run Money Demand (Doctoral dissertation, University of Victoria). Online available at: https://www.uvic.ca/socialsciences/economics/assets/docs/august-31-2020-wang-han-ma-essay.pdf.

Yuliadi, I. (2020). An analysis of money supply in Indonesia: Vector autoregressive (VAR) approach. The Journal of Asian Finance, Economics and Business, 7(7), 241-249. DOI: https://doi.org/10.13106/jafeb.2020.vol7.no7.241

Published

2023-12-25

Issue

Section

Articles

How to Cite

Kamal, F. ., Haq, I. ul ., Khan, D. ., & Gul, H. . (2023). An Empirical Investigation of the Quantity Theory of Money in Pakistan. Bulletin of Business and Economics (BBE), 12(4), 610-615. https://doi.org/10.61506/01.00182