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Sector Composition Bias in Money Demand: Some Evidence for India

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  • Ganti Subrahmanyam
  • B Padma Narayan

Abstract

Money demand specification is the single most-investigated macroeconomic relationship empirically. The monetary policy formulation depends crucially on the parameters of money demand function. An emerging economy undergoes structural change in the sector GDP composition as compared to its developed counterpart. This, obviously, introduces a bias in the estimation of income elasticity of money demand, if the sector GDP composition variable is not introduced into the money demand specification. This study tries to verify this empirically for the Indian economy over the period 1970-71 to 2006-07 for both M1 and M3 specifications. The results indicate that there is significant upward bias in the estimates of income elasticity of money demand for the Indian economy.

Suggested Citation

  • Ganti Subrahmanyam & B Padma Narayan, 2011. "Sector Composition Bias in Money Demand: Some Evidence for India," The IUP Journal of Applied Economics, IUP Publications, vol. 0(3), pages 56-63, July.
  • Handle: RePEc:icf:icfjae:v:10:y:2011:i:3:p:56-63
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