This paper empirically analyzes India’s money demand function during the period of 1980 to 2007 using monthly data and the period of 1976 to 2007 using annual data. Cointegration test results indicated that when money supply is represented by M1 and M2, a cointegrating vector is detected among real money balances, interest rates, and output. In contrast, it was found that when money supply is represented by M3, there is no long-run equilibrium relationship in the　money demand function. Moreover, when the money demand function was estimated using　dynamic OLS, the sign onditions of the coefficients of output and interest rates were found to be　consistent with theoretical rationale, and statistical significance was confirmed when money supply was represented by either M1 or M2. Consequently, though India’s central bank presently uses M3 as an indicator of future price movements, it is thought appropriate to focus on M1 or M2, rather than M3, in managing monetary policy.
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Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number
166.
Length: Date of creation: Sep 2008 Date of revision: Publication status: Published in IDE Discussion Paper. No. 166. 2008.9 Handle: RePEc:jet:dpaper:dpaper166
Find related papers by JEL classification: E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
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