An empirical analysis of the money demand function in India
AbstractThis paper empirically analyzes Indiaâ€™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 theã€€money demand function. Moreover, when the money demand function was estimated usingã€€dynamic OLS, the sign onditions of the coefficients of output and interest rates were found to beã€€consistent with theoretical rationale, and statistical significance was confirmed when money supply was represented by either M1 or M2. Consequently, though Indiaâ€™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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Bibliographic InfoPaper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 166.
Date of creation: Sep 2008
Date of revision:
Publication status: Published in IDE Discussion Paper. No. 166. 2008.9
Postal: Publication Office, IDE 3-2-2 Wakaba, Mihama-ku, Chiba-shi, Chiba 261-8545 JAPAN
Other versions of this item:
- Takeshi Inoue & Shigeyuki Hamori, 2009. "An Empirical Analysis of the Money Demand Function in India," Economics Bulletin, AccessEcon, vol. 29(2), pages 1224-1245.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-13 (All new papers)
- NEP-CBA-2008-10-13 (Central Banking)
- NEP-MAC-2008-10-13 (Macroeconomics)
- NEP-MON-2008-10-13 (Monetary Economics)
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