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Causality between Money, Prices and Output in India (1951-2005): A Granger Causality Approach

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  • Gaurang Rami
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    Abstract

    The relationship between money, price and output is one of the most debated issues among different schools of thought of economics particularly between the Monetarists and Keynesians. The Monetarists argue that money influences the prices and the output, whereas the Keynesians argue that money does not influence the same. Direction of causality among these three and selection of appropriate lag length are widely debated issues in the literature. This study examines the relationship between money, price and output using pairwise Granger causality test on annual data of the Indian economy covering a period from 1951 to 2005. Lag length is selected using standard criteria - LR, FPE, AIC, SC and HQ through VAR estimation. The results strongly support the monetarists view and partially supports the Keynesian view. However, these relationships are sensitive to the lag length selections.

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    Article provided by The Indian Econometric Society in its journal Journal of Quantitative Economics.

    Volume (Year): 8 (2010)
    Issue (Month): 2 ()
    Pages: 20-41

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    Handle: RePEc:jqe:jqenew:v:8:y:2010:i:2:p:20-41

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    Postal: Managing Editor, Journal of Quantitative Economics, Indira Gandhi Institute of Development Research (IGIDR), Gen. A.K. Vaidya Marg, Goregaon (E), Mumbai 400 065 , INDIA
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    1. Kalbe Abbas, 1991. "Causality Test between Money and Income: A Case Study of Selected Developing Asian Countries (1960-1988)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 30(4), pages 919-929.
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    Cited by:
    1. P., Srinivasan & M., Kalaivani, 2013. "On the Temporal Causal Relationship between Macroeconomic Variables: Empirical Evidence from India," MPRA Paper 46803, University Library of Munich, Germany.

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