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Is Money Supply Exogenous? Evidence from India

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  • Santosh Kumar Dash

    (Santosh Kumar Dash is a doctoral student at the Institute for Financial Management and Research, Chennai, India, email: santosh.dash@ifmr.ac.in)

Abstract

Against the backdrop of the claim that the rising growth rate of money is one of the major factors behind India’s recent bout of elevated and sticky inflation, this article asks: Is money supply exogenous or endogenous, and can it predict future inflation. This question is investigated using the monetarist framework of inflation. In the empirical analysis of data spanning from 1970–71 to 2009–10, the results of both the monetarist and the error-correction models suggest that money supply accounts for inflation in India. There is also the presence of an error-correction mechanism among money, inflation and output. However, a monetarist equation does not tell anything about causality. Thus, the vector autoregression (VAR) method is used to detect the direction of causality between money supply and the inflation rate. Findings from Granger causality tests suggest weak evidence of inflation (Granger) causing money supply. As a robustness check, we estimate VAR models using quarterly data and, further, using core inflation. The results of the causality tests from the quarterly data, the impulse response function and forecast error variance decomposition suggest that money supply is weakly endogenous. JEL Classification : E31, E51, E52

Suggested Citation

  • Santosh Kumar Dash, 2017. "Is Money Supply Exogenous? Evidence from India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 11(2), pages 167-195, May.
    • Handle: RePEc:sae:mareco:v:11:y:2017:i:2:p:167-195
    DOI: 10.1177/0973801016689204
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; Monetarism; Quantity Theory of Money; VAR; Granger Causality; Johansen Cointegration;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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