An empirical analysis of the money demand function in India

Takeshi Inoue and Shigeyuki Hamori

No 166, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: This paper empirically analyzes India’s money demand function during the period of 1980 to 2007 using monthly data and the period of 1976 to 2007 using annual data. Cointegration test results indicated that when money supply is represented by M1 and M2, a cointegrating vector is detected among real money balances, interest rates, and output. In contrast, it was found thatwhen money supply is represented by M3, there is no long-run equilibrium relationship in the money demand function. Moreover, when the money demand function was estimated using dynamic OLS, the sign onditions of the coefficients of output and interest rates were found to be consistent with theoretical rationale, and statistical significance was confirmed when moneysupply was represented by either M1 or M2. Consequently, though India’s central bank presently uses M3 as an indicator of future price movements, it is thought appropriate to focus on M1 or M2, rather than M3, in managing monetary policy.

Keywords: Cointegration; DOLS; Money; Money demand; Monetary policy; India; 共和分分析; 動的最小二乗法; 通貨; 貨幣需要; 金融政策; インド (search for similar items in EconPapers)
JEL-codes: E41 E51 (search for similar items in EconPapers)
Date: 2008-09-01
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
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Citations: View citations in EconPapers (19)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 166. 2008-09-01

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https://ir.ide.go.jp/record/38001/files/IDP000166_001.pdf First version, 2008 (application/pdf)

Related works:
Chapter: An Empirical Analysis of the Money Demand Function in India (2014)
Journal Article: An Empirical Analysis of the Money Demand Function in India (2009)
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