Estimating the role of money supply in determining aggregate investment in Pakistan

This study investigates the role of money supply in determining the Pakistan's aggregate investment for the period 1980-2015. Hodric-Prescott Filter method has been applied for extracting the trend from the data. For estimating the results ordinary least squares method, granger causality test and Vector Autoregression has been used. The results revealed that money supply (M1 and M2) increases the aggregate investment in Pakistan. Other variables such as GDP growth rate and saving also showed a positive and significant association with aggregate investment. However, foreign direct investment remained insignificant. These findings recommended that the State Bank of Pakistan can used both M1 and M2 as an effective instrument of monetary policy for increasing the level of aggregate investment component of aggregate demand in the economy.