A Re-Examination of the Long-Run Relationship between Money Supply and Inflation in India
The present study tries to examine the long-run relationship between money supply and prices in the Indian context with the help of both annual data for the period 1953 to 1998 and with the help of monthly data for the period 1993:1 to 1998:12. The present study finds that there still exists a strong influence, though not immediate, of money supply on the price changes in India in the long run. It was also found that money supply is not exogenous and is influenced by prices and output. The results certainly raise doubts about shifting the focus from money supply to interest rates by RBI. The shift to interest rate targeting is not supported by this study. Financial liberalisation has not made income velocity of money unstable in India. Monetary targeting is still useful.
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