This study attempts to identify a stable money demand function for
Pakistan’s economy, where the monetary aggregate is considered the nominal
anchor. With evolving financial innovations and regulations, the stability of
money demand has been the focus of numerous debates. Where earlier studies have
provided conflicting explanations due to inadequate specifications and imprecise
estimations, we find that money demand in Pakistan is stable, if specified properly.
For developing countries such as Pakistan, it is important to target monetary
aggregates or respond to deviations from the desirable path if monetary policy is to
be effectively implemented and communicated; this should remain, if not a
primary, then an auxiliary target in the monetary policy framework.