An empirical analysis of the money demand function in India
This 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.
|Date of creation:||Sep 2008|
|Publication status:||Published in IDE Discussion Paper. No. 166. 2008.9|
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