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| Takeshi Inoue and Shigeyuki Hamori |
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| ''An Empirical Analysis of the Money Demand Function in India'' |
| ( 2009, Vol. 29 No.2 ) |
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| This paper empirically analyzes India'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 the money demand function. Moreover, when
the money demand function was estimated using dynamic OLS, the sign conditions of
the coefficients of output and interest rates were found to be consistent with theoretical
rationale, and statistical significance was confirmed when money supply was
represented by either M1 or M2. Consequently, though India'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.
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| Keywords: |
JEL: E4 - Money and Interest Rates: General
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General |
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| Manuscript Received : Sep 18 2008 | | Manuscript Accepted : Jun 03 2009 |
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