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Testing for long-run stability - an application to money multiplier in India

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  • Gangadhar Darbha

Abstract

In testing for a stable long-run relation between monetary aggregates and reserve money most previous studies have used the conventional tests for cointegration. Using the recently developped residual-based cointegration tests of Gregory and Hansen that explicitly allow for regime shifts, the present paper, contrary to the findings of previous studies, finds that there exists a stable, but time-varying, longrun relation between measures of money stock and reserve money in the Indian context. It also finds that the observed variation in cointegrating relations is better characterized by a discrete one-time shift, rather than a gradually evolving random walk process, attributable, probably, to discrete changes in monetary policy.

Suggested Citation

  • Gangadhar Darbha, 2002. "Testing for long-run stability - an application to money multiplier in India," Applied Economics Letters, Taylor & Francis Journals, vol. 9(1), pages 33-37.
    • Handle: RePEc:taf:apeclt:v:9:y:2002:i:1:p:33-37
    DOI: 10.1080/13504850110047155
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    References listed on IDEAS

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    1. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, March.
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    1. Muhammad Arshad Khan, 2010. "Testing of money multiplier model for Pakistan: does monetary base carry any information?," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 9, pages 1-20, February.
    2. Gabriel Di Bella & Mr. David Hauner, 2005. "How Useful is Monetary Econometrics in Low-Income Countries? T+L3104he Case of Money Demand and the Multipliers in Rwanda," IMF Working Papers 2005/178, International Monetary Fund.
    3. Darrin Downes & Winston Moore & Dwayne Jackson, 2006. "Financial liberalization and the stationarity of money multiplier," International Economic Journal, Taylor & Francis Journals, vol. 20(2), pages 227-240.
    4. K. Moses Tule & O. Taiwo Ajilore, 2016. "On the stability of the money multiplier in Nigeria: Co-integration analyses with regime shifts in banking system liquidity," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1187780-118, December.
    5. Ismet Gocer & Serdar Ongar, 2020. "Re-Examining the Stability of Money Multiplier for the US: The Nonlinear ARDL Model," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 18(1), pages 101-113.
    6. Khurrum S. Mughal & Friedrich G. Schneider & Faheem Aslam & Alishba Tahir, 2021. "Money Multiplier Bias Due to Informal Sector: An Extension of the Existing Money Multiplier," South Asian Journal of Macroeconomics and Public Finance, , vol. 10(2), pages 139-157, December.

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