A Re-look at the Long-Run Stability of the Money Multiplier in India

Vineet Virmani

No WP2004-09-02, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: Results on long-run stability of M1 and M3 money multipliers in India are presented after the BoP crisis. Allowing for in-sample regime switching it is found that M3 money multiplier can be characterized by a one-time regime shift around the beginning of 1997, the time when money markets reform first begun in a big way, with issuance of ad hoc 14-day on tap T-Bills giving way to Ways and Means Advances. Results on the stability of M1 multiplier are less clear and relationship, if it exists, is statistically weak. Although evidence from CUSUM-SQ tests and recent (more powerful) unit root tests suggests that M1 and adjusted monetary base are cointegrated.

Date: 2004-09-02
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