Price Behaviour in India - An Explanation Through a Model of Supply and Demand for Money

C Rangarajan

IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: To what extent can changes in money account for changes in price level? The model presented in this paper seeks to explain changes in price level through the divergence between nominal money supply fixed by monetary authorities and warranted money supply determined by changes in real income. After developing the model in detail an attempt is made to test how far such a model explains the behaviour of general price level in India in the past twenty years. The crucial behavioural relations to be estimated in this model was the demand for money in real terms. Three equations were estimated using three variants of the real income variables. These equations together with the changes in real income formed the basis for computing the price indexes. We estimated the price indexes for the period 1950-51 to 1965-66. While the ‘preferred variant’ of the model performs well in terms of estimating the level of prices it does not perform that well when year to year percentage changes in price level constitute the basis of comparison. Out of 16 years in six years the percentage change in estimated price index differs from the percentage change in actual index by more than 5%.

Date: 1974-04-01
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Persistent link: https://EconPapers.repec.org/RePEc:iim:iimawp:wp00107

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