DOI: 10.36347/sjebm.2016.v03i02.003

Pages: 73-80

Since the nineties, Pakistan like other developing economies has excessively been using various regulations, restrictions, and financial liberalization to transform the financial sector. The financial sector being less state-directed has remained open to foreign banks and non-banks financial institutions, enhancing competition in the market. This paper provides an analysis of broad money demand function and the role of financial liberalization in Pakistan. The ARDL Bounds Approach has been employed with annual time series data from the period 1972-2014. The results provide evidence that financial liberalization has positive effects on broad money demand in both the long-run and short-run. Further, the findings reveal that error correction converges with a slower speed of 23.4% to equilibrium. Furthermore, financial liberalization contributes to the instability of the model for broad money demand. The paper recommends that broad money supply should not be used as policy tool and the policies of the financial liberalization should be used properly to stabilize the money demand function hence, enhancing economic growth in the Pakistan.