Causality between Money, Prices and Output in India (1951-2005): A Granger Causality Approach

Gaurang Rami

Journal of Quantitative Economics, 2010, vol. 8, issue 2, 20-41

Abstract: The relationship between money, price and output is one of the most debated issues among different schools of thought of economics particularly between the Monetarists and Keynesians. The Monetarists argue that money influences the prices and the output, whereas the Keynesians argue that money does not influence the same. Direction of causality among these three and selection of appropriate lag length are widely debated issues in the literature. This study examines the relationship between money, price and output using pairwise Granger causality test on annual data of the Indian economy covering a period from 1951 to 2005. Lag length is selected using standard criteria - LR, FPE, AIC, SC and HQ through VAR estimation. The results strongly support the monetarists view and partially supports the Keynesian view. However, these relationships are sensitive to the lag length selections.

Date: 2010
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