Modeling Money Demand in India: Testing Weak, Strong & Super Exogeneity

Samarjit Das and Kumarjit Mandal
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Kumarjit Mandal: Reserve Bank of India

Indian Economic Review, 2000, vol. 35, issue 1, 1-19

Abstract: This study investigates the following two issues. First, whether money demand function can be estimated by a partial model (conditional Model) in particular, by a single equation specification like the partial adjustement model and distributed lag model, or by a full system method (joint distribution) like Vector autoregressive (VAR) model. Different concepts of exogeneity have been exploited to see the exogeneity status of all the variables under consideration for extimation of the money demand function and it has been found that price and interest rates are weakly exogenous for money implying that the partial model (but not single equation) may be appropriate. It has also been found that only price and short term interest rates are super exogenous with respect to the parameters of the demand for M3 implying that the money demand function should not be inverted to get the price equation. Secondly, this paper also examines the stability of the long run money demand for M3 in India during the period 1981-1998. In spite of the large shocks due to financial liberalization during 1990, the long run demand for M3 is found to be stable. Here it is worthwhile to mention that stability of money demand is a prerequisite condition for super exogeneity

JEL-codes: E44 (search for similar items in EconPapers)
Date: 2000
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