Money Demand Function: A Not-So-Fond Farewell in the Light of Financial Development

Masudul Hasan Adil (), Neeraj Hatekar (), Sana Fatima (), Ibrahim Nurudeen () and Shan Mohammad ()
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Masudul Hasan Adil: Indian Institute of Technology-Palakkad, India, Postal: Indian Institute of Technology Palakkad, Palakkad-678623, Kerala, India.
Neeraj Hatekar: University of Mumbai, India, Postal: Mumbai School of Economics and Public Policy, University of Mumbai, Mumbai-400098, Maharashtra, India.
Sana Fatima: GLA University, India, Postal: GLA University, Mathura-281406, Uttar Pradesh , India.
Ibrahim Nurudeen: Shehu Shagari College of Education, Nigeria, Postal: Shehu Shagari College of Education, Sokoto, Nigeria.
Shan Mohammad: Aligarh Muslim University, India, Postal: Department of Economics, Aligarh Muslim University, Aligarh-202002, Uttar Pradesh, India.

Journal of Economic Integration, 2022, vol. 37, issue 1, 93-120

Abstract: This study investigates the stability issues of real money balances considering financial development. We estimate real narrow (M1) and broad (M3) money demand in India during the post-financial reform, from 1996:Q2 to 2016:Q3. To check the short- and long-run relationships, this study uses the autoregressive distributed lag model of cointegration and other various time series techniques. After incorporating financial development into money demand, we determined short- and long-run relationships and a well-defined open-economy stable money demand specification (M1 and M3) in India. Having established money demand function, the policymaker and central bankers can use monetary aggregates as an indicator or information variable to predict output gaps and inflationary expectations under the inflation-targeting framework.

Keywords: inflation-targeting; money demand; financial development; bound testing; cointegration; impulse response (search for similar items in EconPapers)
JEL-codes: E00 E40 E41 E52 (search for similar items in EconPapers)
Date: 2022
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