An Econometric Analysis of Monthly Demand for Money in India

Abstract

Demand for money function in India has been experimented with various specification and estimation issues. The main focus of this exercise is to re-evaluate the performance of the money demand specifications in the context of identifying suitable determinants. The major concern of this effort is to find out the appropriate channel of monetary transmission mechanism in the economy. In contrast with the prior studies, this study has applied multiple regression, unit root and cointegration tests on host of various money supply aggregates for monthly time series from April, 1990-91 to July, 2013-14 along with output, income and interest rates as money demand function variables. The statistical insignificance of the interest rate variable implies that interest rate cannot be a suitable variable for monetary management variable in India.

Keywords: Money Demand, Multiple Regression, Cointegration, Error Correction

JEL Classification: E4, E41, C32