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An Empirical Evidence of Dynamic Interaction among price level, interest rate, money supply and real income: The case of the Indian Economy

Haroon Rasool, Masudul Hasan Adil and Md Tarique

MPRA Paper from University Library of Munich, Germany

Abstract: Monetary policy approaches in India has changed from simple monetary targeting framework in the mid-1980s to multiple indicator approach in the late 1990s and to the current flexible inflation targeting framework. The aim of this study is to investigate the relationship among selected macroeconomic variables such as, money supply, real income, price level and interest rate for period 1998 to 2014 in case of India; a period when the Multiple Indicator Approach (MIA) was implemented. The study employs vector autoregression (VAR) approach to examine the dynamics of the relationship between variables. The result shows that lags of all dependent variables are significant except real income. The Granger causality via VAR framework suggests that four pairs of Granger causality exist, in particular, bi-directional causality exists between money supply and price level. Interest rate Granger causes both income and price level, and lastly money supply causes the rate of interest. However, the study could not find any causal relationship between real income and money supply in either direction. The findings of Impulse response functions and Variance decomposition reinforce causality results. Finally, the estimated result supports the arguments which are made in favour of policy move from MIA to inflation targeting framework.

Keywords: Multiple Indicator Approach; VAR; Granger causality; IRF and VD. (search for similar items in EconPapers)
JEL-codes: C5 E4 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-knm, nep-mac and nep-mon
Date: 2018
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