I am grateful to Abe, Fry, Min, Vongvipanond, and Yu
(hereafter re¬ferred to as AFMVY) [1] for obliging me to reconsider my
article [2] on the demand for money in Pakistan. Upon careful
examination, I find that the AFMVY results are, in parts, misleading and
that, 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 useful
in that it furnishes us with an opportunity to view some of the
fundamental problems involved in an empi¬rical analysis of the demand
for money function in Pakistan. Based on their elaborate critique, AFMVY
reformulate the two hypo¬theses—the substitution hypothesis and the
complementarity hypothesis— underlying my study and provide us with some
alternative estimates of the demand for money in Pakistan. Briefly their
results, like those in my study, indicate that income and interest rates
are important in deter¬mining the demand for money. However, unlike my
results, they also suggest that the price variable is a highly
significant determinant of the money demand function. Furthermore, while
I found only a weak support for the complementarity between money demand
and physical capital, the results obtained by AFMVY appear to yield a
strong support for that rela¬tionship.1 The difference in results is
only a natural consequence of alter¬native specifications of the theory
and, therefore, I propose to devote most of this reply to the criticisms
raised by AFMVY and the resulting reformulation of the two
mypotheses.
The Demand for Money and the Term Structure of Interest Rates
