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The Money Supply Process in India: Identification, Analysis and Estimation


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  • Goyal, Ashima
  • Dash, Shridhar


A new specification is employed to test for the degree of endogeneity of commercial bank credit, and its response to structural variables relevant to the Indian context. Our specification allows us to both identify money supply in a single equation, and disentangle the contribution of the Central and the Commercial Banks to the money supply process. Bank credit reacted more to financial variables and had dissimilar responses to food and manufacturing prices and output. Instead of interest rates, sectoral returns played a major role. Monetary policy broadly succeeded in preventing an explosive growth in money supply and reined in inflationary expectations. But by targeting manufacturing prices it harmed real output. The estimated structure implies that it would be more efficient to target agricultural prices for inflation control. A monetary contraction should be completed earlier than in the past, and should coincide with a rise in food prices. Information available in the systematic structural features can be exploited in designing monetary policy.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24632.

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Date of creation: Jul 2000
Date of revision:
Publication status: Published in Indian Economic Journal 1.48(2000): pp. 90 -102
Handle: RePEc:pra:mprapa:24632

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Keywords: Money supply endogeneity; identification; information; sectoral prices;

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  1. Thomas I. Palley, 1994. "Competing Views Of The Money Supply Process: Theory And Evidence," Metroeconomica, Wiley Blackwell, vol. 45(1), pages 67-88, 02.
  2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  4. Goyal, A., 1994. "Industrial Pricing and Growth Fluctuations in India," Papers 107, Indira Gandhi Institute of Development Research-.
  5. Goyal, Ashima, 1994. "Growth dynamics in a general equilibrium macroeconomic model for India," Journal of Policy Modeling, Elsevier, vol. 16(3), pages 265-289, June.
  6. Cooley, Thomas F & LeRoy, Stephen F, 1981. "Identification and Estimation of Money Demand," American Economic Review, American Economic Association, vol. 71(5), pages 825-44, December.
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Cited by:
  1. Ashima Goyal, 2008. "The Natural Interest Rate in Emerging Markets," Macroeconomics Working Papers 22379, East Asian Bureau of Economic Research.
  2. Ho Dong Ching, 2011. "Endogenous Money - A Structural Model of Monetary Base," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ52, June.
  3. Goyal, Ashima, 2006. "Macroeconomic policy and the exchange rate: working together?," MPRA Paper 27768, University Library of Munich, Germany.
  4. Das, Rituparna, 2010. "An Outline of the Existing Literature on Monetary Economics in India," MPRA Paper 22825, University Library of Munich, Germany.
  5. Das, Rituparna, 2009. "Endogenous Money, Output and Prices in India," MPRA Paper 14252, University Library of Munich, Germany.
  6. Ashima Goyal, 2011. "History of monetary policy in India since independence," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2011-018, Indira Gandhi Institute of Development Research, Mumbai, India.
  7. Das, Rituparna, 2010. "Econometric Models of Forecasting Money Supply in India," MPRA Paper 21392, University Library of Munich, Germany.


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