The Demand For Money in Pakistan: Reply (Notes and Comments)

I am grateful to Abe, Fry, Min, Vongvipanond, and Yu(hereafter re¬ferred to as AFMVY) [1] for obliging me to reconsider myarticle [2] on the demand for money in Pakistan. Upon carefulexamination, I find that the AFMVY results are, in parts, misleading andthat, on the whole, they add very little to those provided in my study.Nevertheless, the present exercise as well as the one by AFMVY is usefulin that it furnishes us with an opportunity to view some of thefundamental problems involved in an empi¬rical analysis of the demandfor money function in Pakistan. Based on their elaborate critique, AFMVYreformulate the two hypo¬theses—the substitution hypothesis and thecomplementarity hypothesis— underlying my study and provide us with somealternative estimates of the demand for money in Pakistan. Briefly theirresults, like those in my study, indicate that income and interest ratesare important in deter¬mining the demand for money. However, unlike myresults, they also suggest that the price variable is a highlysignificant determinant of the money demand function. Furthermore, whileI found only a weak support for the complementarity between money demandand physical capital, the results obtained by AFMVY appear to yield astrong support for that rela¬tionship.1 The difference in results isonly a natural consequence of alter¬native specifications of the theoryand, therefore, I propose to devote most of this reply to the criticismsraised by AFMVY and the resulting reformulation of the twomypotheses.