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Portfolio Behaviour in a Flow of Funds Model for the Household Sector in India

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  • Tomoe Moore
  • Christopher Green
  • Victor Murinde

Abstract

We estimate a flow of funds model for the household sector in India, within the Almost Ideal Demand System (AIDS) framework, and examine the demand for money and the substitution effects between money and other financial assets. The restricted long-run model, obtained using cointegration techniques, provides stable equilibrium relationship between I(1) variables and broadly satisfies the axioms of rational choice in consumer demand theory. We find that financial sector reform exerts a significant impact on the interest rate structure and household portfolio preferences; specifically, there is strong substitutability among risk-free assets and a possible speculative effect in the stock market, while the exchange rate strongly influences the demand for money. These findings all have important policy implications.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Development Studies.

Volume (Year): 41 (2005)
Issue (Month): 4 ()
Pages: 675-702

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Handle: RePEc:taf:jdevst:v:41:y:2005:i:4:p:675-702

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  1. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, Elsevier, vol. 46(2), pages 317-340, April.
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  6. Sen, Kunal & Roy, Tirthankar & Krishnan, R. & Mundlay, Arundhati, 1996. "A flow of funds model for India and its implications," Journal of Policy Modeling, Elsevier, Elsevier, vol. 18(5), pages 469-494, October.
  7. Robert Simmons, 1992. "An Error-correction Approach to Demand for Money in Five African Developing Countries," Journal of Economic Studies, Emerald Group Publishing, Emerald Group Publishing, vol. 19(1), pages 29-47, January.
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  11. Jenkins, Carolyn, 1999. "Money Demand and Stabilisation in Zimbabwe," Journal of African Economies, Centre for the Study of African Economies (CSAE), Centre for the Study of African Economies (CSAE), vol. 8(3), pages 386-421, October.
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  13. Christopher J. Green & Victor Murinde, 2003. "Flow of funds: implications for research on financial sector development and the real economy," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(8), pages 1015-1036.
  14. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 244, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Moore, Tomoe, 2010. "A Critical Appraisal of McKinnon's Complementarity Hypothesis: Does the Real Rate of Return on Money Matter for Investment in Developing Countries?," World Development, Elsevier, Elsevier, vol. 38(3), pages 260-269, March.

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