TileAn empiical analysis of he money Auho(s) Inoue, Takeshi; Hamoi, Shigeyuki Ciaion IDE Discussion Pape. No. 166. 2008 Issue Dae 2008-09 URL hp://hdl.handle.ne/2344/783 Righs <アジア 経 済 研 究 所 学 術 研 究 リポジトリ ARRIDE> hp://i.ide.go.jp/
INSTITUTE OF DEVELOPING ECONOMIES IDE Discussion Papes ae peliminay maeials ciculaed o simulae discussions and ciical commens IDE DISCUSSION PAPER No. 166 An Empiical Analysis of he Money Demand Funcion in India Takeshi INOUE * and Shigeyuki HAMORI ** Sepembe 2008 Absac This pape empiically analyzes India s money demand funcion duing he peiod of 1980 o 2007 using monhly daa and he peiod of 1976 o 2007 using annual daa. Coinegaion es esuls indicaed ha when money supply is epesened by M1 and M2, a coinegaing veco is deeced among eal money balances, inees aes, and oupu. In conas, i was found ha when money supply is epesened by M3, hee is no long-un equilibium elaionship in he money demand funcion. Moeove, when he money demand funcion was esimaed using dynamic OLS, he sign condiions of he coefficiens of oupu and inees aes wee found o be consisen wih heoeical aionale, and saisical significance was confimed when money supply was epesened by eihe M1 o M2. Consequenly, hough India s cenal bank pesenly uses M3 as an indicao of fuue pice movemens, i is hough appopiae o focus on M1 o M2, ahe han M3, in managing moneay policy. eywods: coinegaion, DOLS, India, money demand JEL classificaion: E41, E52 * Insiue of Developing Economies (akeshi_inoue@ide.go.jp). ** Faculy of Economics, obe Univesiy (hamoi@econ.kobe-u.ac.jp).
The Insiue of Developing Economies (IDE) is a semigovenmenal, nonpaisan, nonpofi eseach insiue, founded in 1958. The Insiue meged wih he Japan Exenal Tade Oganizaion (JETRO) on July 1, 1998. The Insiue conducs basic and compehensive sudies on economic and elaed affais in all developing counies and egions, including Asia, he Middle Eas, Afica, Lain Ameica, Oceania, and Easen Euope. The views expessed in his publicaion ae hose of he auho(s). Publicaion does no imply endosemen by he Insiue of Developing Economies of any of he views expessed wihin. INSTITUTE OF DEVELOPING ECONOMIES (IDE), JETRO 3-2-2, WAABA, MIHAMA-U, CHIBA-SHI CHIBA 261-8545, JAPAN 2008 by Insiue of Developing Economies, JETRO No pa of his publicaion may be epoduced wihou he pio pemission of he IDE-JETRO.
An Empiical Analysis of he Money Demand Funcion in India Inoue Takeshi (Insiue of Developing Economies) and Shigeyuki Hamoi (Faculy of Economics, obe Univesiy) Absac This pape empiically analyzes India s money demand funcion duing he peiod of 1980 o 2007 using monhly daa and he peiod of 1976 o 2007 using annual daa. Coinegaion es esuls indicaed ha when money supply is epesened by M1 and M2, a coinegaing veco is deeced among eal money balances, inees aes, and oupu. In conas, i was found ha when money supply is epesened by M3, hee is no long-un equilibium elaionship in he money demand funcion. Moeove, when he money demand funcion was esimaed using dynamic OLS, he sign condiions of he coefficiens of oupu and inees aes wee found o be consisen wih heoeical aionale, and saisical significance was confimed when money supply was epesened by eihe M1 o M2. Consequenly, hough India s cenal bank pesenly uses M3 as an indicao of fuue pice movemens, i is hough appopiae o focus on M1 o M2, ahe han M3, in managing moneay policy. JEL classificaion : E41; E52 eywods : Coinegaion; DOLS; India; Money Demand
1. Inoducion In India, financial seco deegulaion was undeaken beginning in he mid-1980s, when seps like he inoducion of 182-day Teasuy bills, lifing of he call money inees-ae ceiling, and he inoducion of ceificaes of deposi and commecial pape wee aken in a bid o make he govenmen secuiies make and he money make moe efficien (Sen and Vaidya 1997 [18]). Fuhemoe, wih he balance of paymens cisis in 1991, hee began an inemien seies of moe sysemaic financial seco efoms ha coninues even oday. Fo example, he efom of he Indian inees-ae sucue, which had been sicly managed by he Reseve Bank of India (RBI), began wih he Apil 1992 deegulaion of deposi aes and has pogessed o he poin whee commecial banks ae now pemied o feely se em deposi aes and lending aes fo loans above Rs.2 lakh. 1 Moeove, he RBI, which had long been consained by he Indian govenmen's fiscal managemen, eneed ino an ageemen wih he govenmen in Sepembe 1994 o limi he issuance of 91-day ad hoc Teasuy bills, which wee used o finance fiscal deficis, and evenually eliminaed hese secuiies alogehe in Apil 1997, gealy eining in he cenal bank's auomaic moneizaion of fiscal deficis. 2 The above ae jus a few examples of how inees-ae sucue deegulaion and he inoducion of new financial poducs have pogessed in India ove he pas 20 yeas. Theoeical eseach and empiical analyses, using pimaily daa on developed counies, have shown ha he money demand funcion can become unsable as a esul of such financial innovaions and financial seco efoms. Paly because of insabiliy in he money demand funcion, many cenal banks have in ecen yeas swiched fom money supply ageing focused on moneay aggegaes as he inemediae age, o inflaion ageing, which seeks o sabilize pices by adjusing inees aes based on inflaion foecass. The RBI abandoned he flexible moneay ageing appoach in favo of he muliple indicao appoach in Apil 1998, puing an end o he use of money supply as he inemediae age, bu eaining i as an impoan indicao of fuue pices. Consequenly, examining he chaaceisics of he money demand funcion of India's financial seco, which has undegone significan change since he 1980s, should bea significan meaning fo pesen and fuue consideaions of he RBI s moneay policy. This pape, heefoe, uses annual daa fo he peiod of 1976 o 2007 and monhly daa fo he peiod of Januay 1980 o Decembe 2007 o esimae India's money 1 Excep fo bank savings deposis, non-esiden deposis, loans fo less han 200,000 upees, and expo cedi, inees aes have been gealy deegulaed. 2 Financial deegulaion beginning in he 1990s also loosened equiemens, like hose equiing commecial banks o keep cenal bank balances equal o a ceain pecenage of hei own deposis and puchase govenmen bonds and govenmen-specified bonds, and he deegulaion elaxed baies o eneing he banking seco and opened sock makes o foeign paicipans. 1
demand funcion, which is deived fom eal money balances, inees aes, and oupu, and shed ligh on is chaaceisics. The nex secion of his pape consiss of a eview of elevan pio eseach and a discussion of he unique conibuions of his pape. In he hid secion, he models ae pesened and in he fouh secion, vaiables ae defined, souces ae povided, and daa chaaceisics ae explained. Moving ino he fifh secion, coinegaion ess ae pefomed using boh monhly and annual daa, he long-em sabiliy of he money demand funcion is examined, and dynamic OLS (DOLS) is used o examine he sign condiions and significance of oupu and inees-ae coefficiens. Lasly, analysis esuls ae used o discuss he chaaceisics of India's money demand funcion and he implicaions fo India's moneay policy. 2. Lieaue Review India's money demand funcion has been he subjec of numeous quaniaive eseach effos. Among hese was he fis sudy o explicily conside he saionaiy of, and coinegaion elaionships among, he vaiables of he money demand funcion. Moosa (1992) used hee ypes of money supply cash, M1, and M2 o pefom coinegaion ess on eal money balances, sho-em inees aes, and indusial poducion ove he peiod beginning wih he fis quae of 1972 and exending hough he fouh quae of 1990. Resuls indicaed ha fo all hee ypes of money supply, he money balance had a coinegaing elaionship wih oupu and inees aes. Howeve, geae numbes of coinegaing vecos wee deeced fo cash and M1 han fo M2, so Moosa (1992) saes ha naowe definiions of money supply ae bee fo pusuing moneay policy. Bhaachaya (1995), like Moosa (1992), consideed hee ypes of money supply M1, M2, and M3 and used annual daa fo he peiod of 1950 o 1980 o analyze India's money demand funcion. Bhaachaya (1995) pefomed coinegaion ess fo eal money balances, eal GNP, and long-em and sho-em inees aes, deeced a coinegaing elaionship among vaiables only when money supply was defined as M1, and clealy showed ha long-em inees aes ae moe sensiive o money demand han ae sho-em inees aes. In addiion, Bhaachaya (1995), afe esimaing an eo coecion model based on coinegaion es esuls, found ha, in he case of M1, he eo coecion em is significan and negaive, and held ha moneay policy is sable ove he long em when money supply is naowly defined. Bahmani-Oskooee and Rehman (2005) analyzed he money demand funcions fo India and six ohe Asian counies duing he peiod beginning wih he fis quae of 1972 and ending wih he fouh quae of 2000. Using he ARDL appoach descibed in Pesaan e al. (2001), 2
hey pefomed coinegaion ess on eal money supplies, indusial poducion, inflaion aes, and exchange aes (in ems of US dolla). Fo India, coinegaing elaionships wee deeced when money supply was defined as M1, bu no M2, so hey concluded ha M1 is he appopiae money supply definiion o use in seing moneay policy. Conasing wih he above, hee is also pio eseach ha uses money supply defined boadly in holding ha India's money demand funcion is sable. In one example, Padhan and Subamanian (1997) employed coinegaion ess, an eo coecion model, and annual daa fo he peiod of 1960 o 1994 o deec elaionships among eal money balances, eal GDP, and nominal inees aes. They esimaed an eo coecion model using M1 and M3 as money supply definiions and found he eo coecion em o be significan and negaive. Thei posiion, heefoe, was ha he money demand funcion is sable no only wih M1 bu also wih M3. Das and Mandal (2000) consideed only he M3 money supply in saing ha India's money demand funcion is sable. They used monhly daa fo he peiod of Apil 1981 o Mach 1998 o pefom coinegaion ess and deeced coinegaing vecos among money balance, indusial poducion, sho-em inees aes, wholesale pices, shae pices, and eal effecive exchange aes. Thei posiion, heefoe, was ha long-em money demand elevan o M3 is sable. Similaly, Ramachandan (2004), oo, consideed only he M3 money supply in using annual daa fo he peiod of 1951/52 o 2000/01 o pefom coinegaion ess on nominal money supply, oupu, and pice levels. Because sable elaionships wee discoveed among hese hee vaiables, Ramachandan (2004) saes ha, ove he long em, i is possible o use an incease in M3 as a laen indicao of fuue pice movemens. As is he case wih he sudies efeed o above, pio eseach in geneal saes ha India's money demand funcion is sable. 3 Fuhemoe, sudies pefomed using muliple money supply definiions have ended o daw he conclusion ha because India's money demand funcion is moe sable when money supply is defined naowly, he cenal bank should adop cash o M1 as he naow definiion of money supply when deemining moneay policy. Conasing wih ha posiion, howeve, ohe sudies have concluded ha he money demand funcion is sable when money supply is boadly defined. Views on wha definiion of money supply o use fo moneay policy, heefoe, diffe. This pape uses boh monhly and annual daa, consides hee ypes of money supply M1, M2, and M3, and compehensively esimaes India's money demand funcions fo each case. I 3 Nag and Upadhyay (1993), Paikh (1994), Rao and Shalabh (1995), Rao and Singh (2006), and ohes as well have also pefomed quaniaive analyses of India s money demand funcion. 3
also discusses he implicaions of empiical esuls fo he RBI s moneay policy fomaion. In conas wih pio sudies, his pape, afe pefoming coinegaion ess on money supply, oupu, and inees aes as money demand funcion vaiables, applies DOLS and sheds ligh on he chaaceisics of India's money demand funcion hough examinaions of he sign condiions and saisical significance of vaiable coefficiens. 3. Models Thee ae vaious heoies concening he money demand funcion. Fo example, imbough (1986a, 1986b) and Faig (1988) came up wih he following money demand funcion as a esul of explicily consideing ansacion coss. = >, < (1) In his fomula, index fo peiod ; epesens nominal money supply fo peiod ; epesens oupu fo peiod ; and epesens he pice epesens he nominal inees ae fo peiod. Inceases in oupu bing inceases in money demand, and inceases in inees aes bing deceases in money demand. We use wo models coesponding o equaion (1) in ode o conduc an empiical analysis. Model 1: = β + β + β +, β > β < (2) Model 2: = β + β + β +, β > β < (3) Boh Models (2) and (3) ae log linea models, bu Model (2) uses he level of inees aes and Model (3) uses he logaihm value of inees aes. 4. Daa This pape uses boh monhly daa and annual daa fo empiical analysis. Fo monhly daa, we use daa ove he peiod of Januay 1980 o Decembe 2007. The daa souce fo he indusial poducion index (seasonally adjused by X12) and he wholesale pice index is IMF (2008). We obained M1, M2, and M3 fom vaious issues of he RBI Bullein. We deflae hese moneay aggegaes by he wholesale pice index, and we use he call ae as he inees ae. 4
The call ae was obained fom RBI (2006) ove he peiod of Januay 1980 o Decembe 2005, RBI (2007a) and RBI (2008) ove he peiod of Januay 2006 o Decembe 2007. Fo annual daa, we use daa ove he peiod of 1976 o 2007. Real GDP and he GDP deflao wee aken fom IMF (2008). We obained M1, M2, and M3 fom vaious issues of he RBI Bullein. We deflae hese moneay aggegaes by he GDP deflao, and we use he call ae as he inees ae. The call ae was obained fom RBI (2007b) and RBI (2008). Logaihm values ae used fo money supply, pice levels, and oupu (indusial poducion and GDP). Inees aes ae analyzed in wo ways, aking a logaihm in one case and no in he ohe. As a peliminay analysis, we caied ou he augmened Dickey-Fulle ess fo he logs of eal money balances, oupu, and inees aes (Dickey and Fulle 1979). As a esul, he level of each vaiable was found o have a uni oo, wheeas he fis diffeence of each vaiable was found no o have a uni oo. Thus, we can say ha each vaiable is a nonsaionay vaiable wih a uni oo. 5. Empiical Resuls 5.1 Monhly Daa Fis, we analyzed he money demand funcion in elaion o he use of M1 using he monhly daa ove he peiod of Januay 1980 o Decembe 2007. Fo ha analysis, we conduced Johansen coinegaion ess fo he money demand funcion (Johansen 1991). Thee ae wo kinds of Johansen-ype ess: he ace es and he maximum eigen-value es. Table 1 shows he esuls of coinegaion ess fo Model 1 and Model 2. Model 1 includes he logs of eal money balances, he logs of indusial poducion, and he inees ae; wheeas Model 2 includes he logs of eal money balances, he logs of indusial poducion, and he logs of inees aes. As is eviden fom Table 1, he null hypohesis of no coinegaing elaion is ejeced a he 5% significance level fo boh models. As he exisence of he coinegaing elaion was suppoed, we esimaed he money demand funcion using dynamic OLS (DOLS). 4 Table 2 shows he esimaion esuls wih espec o Model 1. As is eviden fom his able, he oupu coefficien is significanly esimaed o be a posiive values (1.1484 fo =1, 1.1498 fo =2, and 1.1556 fo =6). The inees ae coefficien is significanly esimaed o be a negaive values (-0.0043 fo =1, -0.0049 fo =2, and -0.0050 fo =6). Thus, he sign condiion of he money demand funcion holds fo all cases. Table 3 shows he esimaion esuls wih espec o Model 2. As is eviden fom his able, he sign condiion of he money demand funcion holds fo all cases. The oupu coefficien was significanly esimaed a 4 Sandad eos ae calculaed using he mehod of Newey and Wes (1987). 5
posiive values (1.1432 fo =1, 1.1437 fo =2, and 1.1478 fo =6), while he inees ae coefficien was significanly esimaed a negaive values (-0.0480 fo =1, -0.0548 fo =2, and -0.0595 fo =6). As is eviden fom he above esuls, i became clea ha a coinegaing elaion was suppoed and ha he exisence of a money demand funcion wih espec o M1 was saisically suppoed. Nex, we consideed he money demand funcion when using M2 fo he money supply componen. Table 4 indicaes he esuls of coinegaion ess fo Model 1 and Model 2. As is eviden fom he able, he null hypohesis of no coinegaion is ejeced a he 5% significance level fo boh models. As he exisence of he coinegaing elaion was suppoed, we esimaed he money demand funcion using DOLS. Table 5 shows he esimaion esuls wih espec o Model 1. As is eviden fom his able, he sign condiion of he money demand funcion holds. The oupu coefficien was significanly esimaed a posiive values of 1.0966 fo =1, 1.0977 fo =2, and 1.1023 fo =6, while he inees ae coefficien was significanly esimaed a negaive values of -0.0049 fo =1, -0.0055 fo =2, and -0.0059 fo =6. Table 6 shows he esimaion esuls wih espec o Model 2. As is eviden fom his able, he sign condiion of he money demand funcion holds. The oupu coefficien was significanly esimaed a posiive values of 1.0907 fo =1, 1.0908 fo =2, and 1.0934 fo =6, while he inees ae coefficien was significanly esimaed a negaive values of -0.0543 fo =1, -0.0617 fo =2, and -0.0685 fo =6. As is eviden fom he above esuls, i became clea ha a coinegaing elaion was suppoed and ha he exisence of a money demand funcion wih espec o M2 was saisically suppoed. Finally, we consideed he money demand funcion when using M3 fo he money supply componen. Table 7 indicaes he esuls of coinegaion ess fo Model 1 and Model 2. As is eviden fom his able, he null hypohesis (in which hee is no coinegaing elaion) is no ejeced a he 5% significance level fo eihe of he models. I became clea ha a coinegaing elaion was no suppoed and hus ha he exisence of a money demand funcion wih espec o M3 was no saisically suppoed. 5.2 Annual Daa We also analyzed he money demand funcion in elaion o he use of M1 using he annual daa ove he peiod fom 1976 o 2007. Since indusial poducion does no necessaily eflec he oal level of oupu in he Indian economy, i is wohwhile o analyze he money demand funcion using annual daa, which enables us o use he GDP daa. Table 8 shows he esuls of coinegaion ess fo Model 1 and Model 2. As is eviden fom Table 8, he null hypohesis of 6
no coinegaing elaion is ejeced a he 5% significance level fo boh models. As he exisence of he coinegaing elaion was suppoed, we esimaed he money demand funcion using DOLS. Table 9 shows he esimaion esuls wih espec o Model 1. As is eviden fom his able, he oupu coefficien is significanly esimaed o be posiive (1.0037 fo =1, 0.9812 fo =2, and 0.9769 fo =3). The inees ae coefficien is significanly esimaed o be negaive (-0.0366 fo =1, -0.0260 fo =2, and -0.0242 fo =3). Thus, he sign condiion of he money demand funcion holds fo all cases. Table 10 shows he esimaion esuls wih espec o Model 2. As is eviden fom his able, he sign condiion of he money demand funcion holds fo all cases. The oupu coefficien was significanly esimaed o be posiive (1.0020 fo =1, 1.0011 fo =2, and 1.0624 fo =3), while he inees ae coefficien was significanly esimaed o be negaive (-0.3399 fo =1, -0.2321 fo =2, and -0.2378 fo =3). As is eviden fom he above esuls, i became clea ha a coinegaing elaion was suppoed and ha he exisence of a money demand funcion wih espec o M1 was saisically suppoed. Nex, we consideed he money demand funcion when using M2 fo he money supply componen. Table 11 indicaes he esuls of coinegaion ess fo Model 1 and Model 2. As is eviden fom he able, he null hypohesis of no coinegaion is ejeced a he 5% significance level fo boh models. As he exisence of he coinegaing elaion was suppoed, we esimaed he money demand funcion using DOLS. Table 12 shows he esimaion esuls wih espec o Model 1. As is eviden fom his able, he sign condiion of he money demand funcion holds. The oupu coefficien was significanly esimaed a posiive values of 0.9402 fo =1, 0.9173 fo =2, and 0.9132 fo =3, while he inees ae coefficien was significanly esimaed a negaive values of -0.0397 fo =1, -0.0295 fo =2, and -0.0278 fo =3. Table 13 shows he esimaion esuls wih espec o Model 2. As is eviden fom his able, he sign condiion of he money demand funcion holds. The oupu coefficien was significanly esimaed a posiive values of 0.9381 fo =1, 0.9374 fo =2, and 0.9988 fo =3, while he inees ae coefficien was significanly esimaed a negaive values of -0.3669 fo =1, -0.2648 fo =2, and -0.2715 fo =3. As is eviden fom he above esuls, i became clea ha a coinegaing elaion was suppoed and ha he exisence of a money demand funcion wih espec o M2 was saisically suppoed. Finally, we consideed he money demand funcion when using M3 fo he money supply componen. Table 14 indicaes he esuls of coinegaion ess fo Model 1 and Model 2. As is eviden fom his able, he null hypohesis (in which hee is no coinegaing elaion) is no ejeced a he 5% significance level in hee ou of fou cases. I became clea ha a coinegaing elaion may no be suppoed and hus ha he exisence of a money demand 7
funcion wih espec o M3 may no be saisically suppoed. Ou empiical esuls using annual daa ae consisen wih hose using monhly daa. Thus, he coinegaing elaion fo he money demand funcion is saisically suppoed fo M1 and M2, bu no fo M3 fo boh monhly and annual daa. 6. Some Concluding Remaks If an equilibium elaionship is obseved in he money demand funcion, financial auhoiies can employ appopiae money supply conols o mainain a easonable inflaion ae. This pape empiically analyzed India's money demand funcion ove he peiod of 1980 o 2007 using monhly daa and he peiod of 1976 o 2007 using annual daa. Resuls suppoed he exisence of an equilibium elaion in money demand when money supply was defined as M1 o M2, bu no such elaion was deeced when money supply was defined as M3. These esuls wee obained fo boh monhly and annual daa, so hey wee no affeced by daa inevals and wee obus in his sense. Wha ae he implicaions of hese esuls fo India's moneay policy? In he mid-1980s, he RBI adoped moneay ageing focused on he medium-em gowh ae of he M3 money supply. Moneay ageing was used as a flexible policy famewok o be adjused in accodance wih changes in poducion and pices, ahe han as a sic policy ule. Howeve, amid ongoing financial innovaions and financial seco efoms, he RBI announced in Apil 1998 ha i would swich o he muliple indicao appoach in ode o be able o conside a wide aay of facos in seing policy. Unde his new policy famewok, he M3 gowh ae is used as one efeence indicao. In geneal, a efeence indicao, as an indicao of fuue economic condiions, is used as somehing beween an opeaing insumen and a final objecive, and no age levels ae se, as is he case, fo example, wih inemediae ages. Howeve, in India, whee i is used as a efeence indicao, he foecas gowh ae fo he M3 money supply is publicly announced on an annual basis, and i is focused on as a measue of fuue pice movemens. Consequenly, Indian financial auhoiies, despie he fac ha hey have changed hei policy famewok, coninue o pay significan aenion o M3 movemens. The empiical esuls of his pape, hough, sugges ha he RBI would be able o moe appopiaely conol pice levels if i would efe o he M1 and M2, ahe han he M3, money supplies in managing moneay policy. 8
Refeences Bahmani-Oskooee, Mohsen, and Hafez Rehman. 2005. "Sabiliy of he Money Demand Funcion in Asian Developing Counies." Applied Economics 37, no. 7: 773-792. Bhaachaya, Radha. 1995. "Coinegaing Relaionships in he Demand fo Money in India." The Indian Economic Jounal 43, no. 1: 69-75. Das, Samaji, and umaji Mandal. 2000. "Modeling Money Demand in India: Tesing Weak, Song & Supe Exogeneiy." Indian Economic Review 35, no. 1: 1-19. Dickey, David A., and Wayne A. Fulle. 1979. "Disibuion of he Esimaos fo Auoegessive Time Seies wih a Uni Roo." Jounal of he Ameican Saisical Associaion 74, no. 366: 427-431. Faig, Miquel. 1988. "Chaaceizaion of he Opimal Tax on Money when i Funcions as a Medium of Exchange." Jounal of Moneay Economics 22, no. 1: 137-148. Inenaional Moneay Fund. 2008. Inenaional Financial Saisics. Washingon, D.C.: IMF, Apil. Johansen, Søen. 1991. "Esimaion and Hypohesis Tesing of Coinegaion Vecos in Gaussian Veco Auoegessive Models." Economeica 59, no. 6: 1551-1580. imbough, en P. 1986a. "Inflaion, Employmen, and Welfae in he Pesence of Tansacions Coss." Jounal of Money, Cedi, and Banking 18, no. 2: 127-140. imbough, en P. 1986b. "The Opimum Quaniy of Money Rule in he Theoy of Public Finance." Jounal of Moneay Economics 18, no. 3: 277-284. Moosa, Imad. 1992. "The Demand fo Money in India: A Coinegaion Appoach." The Indian Economic Jounal 40, no. 1: 101-115. Nag, Ashok., and Ghanshyam Upadhyay. 1993. "Esimaing Money Demand Funcion: A Coinegaion Appoach." Reseve Bank of India Occasional Papes 14, no. 1: 47-66. Newey, Whiney and enneh, Wes. 1987. "A Simple Posiive Semi-Definie, Heeoskedasiciy and Auocoelaion Consisen Covaiance Maix." Economeica 55, no.3: 703 708. Paikh, Ashok. 1994. "An Appoach o Moneay Tageing in India." Reseve Bank of India Developmen Reseach Goup Sudy, no. 9, Ocobe. Pesaan, M. H., Y. Shin, and R. J. Smih. 2001. "Bounds Tesing Appoaches o he Analysis of Level Relaionships." Jounal of Applied Economeics 16, no. 3: 289-326. Padhan, B.., and A. Subamanian. 1997. "On he Sabiliy of he Demand fo Money in India." The Indian Economic Jounal 45, no. 1: 106-117. Ramachandan, M. 2004. "Do Boad Money, Oupu, and Pices Sand fo a Sable Relaionship 9
in India?" Jounal of Policy Modeling 26, nos. 8-9: 983-1001. Rao, Bhaskaa B., and Shalabh. 1995. "Uni Roos Coinegaion and he Demand fo Money in India." Applied Economics Lees 2, no. 10: 397-399. Rao, Bhaskaa B., and Rup Singh. 2006. "Demand fo Money in India: 1953-2003." Applied Economics 38, no. 11: 1319-1326. Reseve Bank of India. 2006. Handbook of Moneay Saisics of India. Mumbai: RBI, Mach. Reseve Bank of India. 2007a. Macoeconomic and Moneay Developmens Fis Quae Review 2007-08. Mumbai: RBI, July. Reseve Bank of India. 2007b. Handbook of Saisics on Indian Economy. Mumbai: RBI, Ocobe. Reseve Bank of India. 2008. Macoeconomic and Moneay Developmens in 2007-08. Mumbai: RBI, Apil. Reseve Bank of India. vaious issues. RBI Bullein. Mumbai: RBI. Sen, unal, and Rajenda R. Vaidya. 1997. The Pocess of Financial Libealizaion. Delhi: Oxfod Univesiy Pess. 10
Table 1 Coinegaion Tess (M1, Monhly daa) Hypohesized Model Numbe of Coinegaion Maximum Eigen- Value Tes Tace Tes Equaions Model 1 0 60.8885* 75.5725* A mos 1 13.9371 14.6841 A mos 2 0.7470 0.7470 Model 2 0 62.6358* 77.4240* A mos 1 14.0725 14.7883 A mos 2 0.7157 0.7157 * indicaes ha he null hypohesis is ejeced a he 5% significance level. 11
Table 2 Dynamic OLS (M1, Monhly daa, Model 1) 0 1 2 i= yi i= i log( m 1 ) log( p ) = β + β log( y ) + β + γ Δ log( y ) + γ Δ + u Lead and Lag 2 Vaiable Coefficien SE -Saisic P-value R = 1 Consan 2.9533 0.0741 39.8611 0.0000 0.9911 ) 1.1484 0.0158 72.4935 0.0000-0.0043 0.0012-3.5416 0.0005 = 2 Consan 2.9478 0.0626 47.0700 0.0000 0.9923 ) 1.1498 0.0135 85.2199 0.0000-0.0049 0.0012-4.0843 0.0001 = 6 Consan 2.9130 0.0539 54.0741 0.0000 0.9947 ) 1.1556 0.0107 108.2575 0.0000-0.0050 0.0015-3.3923 0.0008 Noe: SE is he Newy-Wes HAC Sandad Eo (lag uncaion=5). 12
Table 3 Dynamic OLS (M1, Monhly daa, Model 2) log( m 1 ) log( p ) = β + β log( y ) + β log( ) + γ Δ log( y ) + γ Δ log( ) + u 0 1 2 i= yi i= i Lead and Lag 2 Vaiable Coefficien SE -Saisic P-value R = 1 Consan 3.0363 0.0894 33.9515 0.0000 0.9911 ) 1.1432 0.0164 69.6620 0.0000-0.0480 0.0134-3.5715 0.0004 = 2 Consan 3.0445 0.0755 40.3038 0.0000 0.9924 ) 1.1437 0.0138 82.8285 0.0000-0.0548 0.0127-4.3211 0.0000 = 6 Consan 3.0247 0.0655 46.2015 0.0000 0.9950 ) 1.1478 0.0104 109.8776 0.0000-0.0595 0.0144-4.1434 0.0000 Noe: SE is he Newy-Wes HAC Sandad Eo (lag uncaion=5). 13
Table 4 Coinegaion Tess (M2, Monhly daa) Hypohesized Model Numbe of Coinegaion Maximum Eigen- Value Tes Tace Tes Equaions Model 1 0 25.3333* 39.3050* A mos 1 11.8306 13.9716 A mos 2 2.1411 2.1411 Model 2 0 26.2955* 39.6353* A mos 1 11.0450 13.3398 A mos 2 2.2948 2.2948 * indicaes ha he null hypohesis is ejeced a he 5% significance level. 14
Table 5 Dynamic OLS (M2, Monhly daa, Model 1) 0 1 2 i= yi i= i log( m 2 ) log( p ) = β + β log( y ) + β + γ Δ log( y ) + γ Δ + u Lead and Lag 2 Vaiable Coefficien SE -Saisic P-value R = 1 Consan 3.2129 0.0760 42.2970 0.0000 0.9899 ) 1.0966 0.0165 66.5934 0.0000-0.0049 0.0012-3.9508 0.0001 = 2 Consan 3.2096 0.0655 49.0098 0.0000 0.9913 ) 1.0977 0.0143 76.7408 0.0000-0.0055 0.0012-4.5206 0.0000 = 6 Consan 3.1817 0.0583 54.5536 0.0000 0.9938 ) 1.1023 0.0117 94.5821 0.0000-0.0059 0.0015-3.8277 0.0002 Noe: SE is he Newy-Wes HAC Sandad Eo (lag uncaion=5). 15
Table 6 Dynamic OLS (M2, Monhly daa, Model 2) log( m 2 ) log( p ) = β + β log( y ) + β log( ) + γ Δ log( y ) + γ Δ log( ) + u 0 1 2 i= yi i= i Lead and Lag 2 Vaiable Coefficien SE -Saisic P-value R = 1 Consan 3.3066 0.0914 36.1578 0.0000 0.9900 ) 1.0907 0.0170 64.2289 0.0000-0.0543 0.0139-3.8990 0.0001 = 2 Consan 3.3180 0.0787 42.1394 0.0000 0.9914 ) 1.0908 0.0146 74.9043 0.0000-0.0617 0.0133-4.6363 0.0000 = 6 Consan 3.3084 0.0700 47.2392 0.0000 0.9941 ) 1.0934 0.0114 96.2653 0.0000-0.0685 0.0149-4.6022 0.0000 Noe: SE is he Newy-Wes HAC Sandad Eo (lag uncaion=5). 16
Table 7 Coinegaion Tess (M3, Monhly daa) Hypohesized Model Numbe of Coinegaion Maximum Eigen- Value Tes Tace Tes Equaions Model 1 0 20.4033 27.3507 A mos 1 5.2173 6.9474 A mos 2 1.7301 1.7301 Model 2 0 19.4088 25.9354 A mos 1 5.0979 6.5266 A mos 2 1.4287 1.4287 * indicaes ha he null hypohesis is ejeced a he 5% significance level. 17
Table 8 Coinegaion Tess (M1, Annual daa) Hypohesized Model Numbe of Coinegaion Maximum Eigen- Value Tes Tace Tes Equaions Model 1 0 29.0382* 40.3709* A mos 1 8.8912 11.3327 A mos 2 2.4415 2.4415 Model 2 0 31.2939* 42.7403* A mos 1 8.9359 11.4464 A mos 2 2.5105 2.5105 * indicaes ha he null hypohesis is ejeced a he 5% significance level. 18
Table 9 Dynamic OLS (M1, Annual daa, Model 1) 0 1 2 i= yi i= i log( m 1 ) log( p ) = β + β log( y ) + β + γ Δ log( y ) + γ Δ + u Lead and Lag 2 Vaiable Coefficien SE -Saisic P-value R = 1 Consan 4.0407 0.2939 13.7502 0.0000 0.9716 ) 1.0037 0.0768 13.0640 0.0000-0.0366 0.0099-3.7002 0.0014 = 2 Consan 3.8224 0.1669 22.9069 0.0000 0.9944 ) 0.9812 0.0448 21.9224 0.0000-0.0260 0.0058-4.4821 0.0005 = 3 Consan 3.7578 0.1312 28.6378 0.0000 0.9952 ) 0.9769 0.0470 20.7860 0.0000-0.0242 0.0048-5.0189 0.0010 Noe: SE is he Newy-Wes HAC Sandad Eo (lag uncaion=5). 19
Table 10 Dynamic OLS (M1, Annual daa, Model 2) log( m 1 ) log( p ) = β + β log( y ) + β log( ) + γ Δ log( y ) + γ Δ log( ) + u 0 1 2 i= yi i= i Lead and Lag 2 Vaiable Coefficien SE -Saisic P-value R = 1 Consan 4.4896 0.3875 11.5861 0.0000 0.9738 ) 1.0020 0.0772 12.9872 0.0000-0.3399 0.0873-3.8949 0.0009 = 2 Consan 4.0882 0.2591 15.7774 0.0000 0.9942 ) 1.0011 0.0524 19.1028 0.0000-0.2321 0.0615-3.7765 0.0020 = 3 Consan 3.8970 0.1522 25.6072 0.0000 0.9944 ) 1.0624 0.0446 23.8410 0.0000-0.2378 0.0532-4.4676 0.0021 Noe: SE is he Newy-Wes HAC Sandad Eo (lag uncaion=5). 20
Table 11 Coinegaion Tess (M2, Annual daa) Hypohesized Model Numbe of Coinegaion Maximum Eigen- Value Tes Tace Tes Equaions Model 1 0 29.4465* 40.2924* A mos 1 8.9430 10.8459 A mos 2 1.9029 1.9029 Model 2 0 31.8685* 42.6966* A mos 1 8.9294 10.8281 A mos 2 1.8988 1.8988 * indicaes ha he null hypohesis is ejeced a he 5% significance level. 21
Table 12 Dynamic OLS (M2, Annual daa, Model 1) 0 1 2 i= yi i= i log( m 1 ) log( p ) = β + β log( y ) + β + γ Δ log( y ) + γ Δ + u Lead and Lag 2 Vaiable Coefficien SE -Saisic P-value R = 1 Consan 4.3669 0.2886 15.1317 0.0000 0.9676 ) 0.9402 0.0760 12.3674 0.0000-0.0397 0.0098-4.0638 0.0006 = 2 Consan 4.1610 0.1650 25.2232 0.0000 0.9936 ) 0.9173 0.0443 20.7286 0.0000-0.0295 0.0057-5.1387 0.0002 = 3 Consan 4.1007 0.1311 31.2843 0.0000 0.9948 ) 0.9132 0.0478 19.1190 0.0000-0.0278 0.0049-5.7213 0.0004 Noe: SE is he Newy-Wes HAC Sandad Eo (lag uncaion=5). 22
Table 13 Dynamic OLS (M2, Annual daa, Model 2) log( m 1 ) log( p ) = β + β log( y ) + β log( ) + γ Δ log( y ) + γ Δ log( ) + u 0 1 2 i= yi i= i Lead and Lag 2 Vaiable Coefficien SE -Saisic P-value R = 1 Consan 4.8505 0.3788 12.8058 0.0000 0.9702 ) 0.9381 0.0757 12.3845 0.0000 log( ) -0.3669 0.0857-4.2806 0.0004 = 2 Consan 4.4693 0.2556 17.4837 0.0000 0.9935 ) 0.9374 0.0511 18.3566 0.0000 log( ) -0.2648 0.0613-4.31665 0.0007 = 3 Consan 4.2862 0.1556 27.5495 0.0000 0.9938 ) 0.9988 0.0463 21.5558 0.0000 log( ) -0.2715 0.0541-5.0207 0.0010 Noe: SE is he Newy-Wes HAC Sandad Eo (lag uncaion=5). 23
Table 14 Coinegaion Tess (M3, Annual daa) Hypohesized Model Numbe of Coinegaion Maximum Eigen- Value Tes Tace Tes Equaions Model 1 0 20.7221 31.4139* A mos 1 6.7122 10.6918 A mos 2 3.9796 3.9796 Model 2 0 18.0444 28.3185 A mos 1 6.5157 10.2741 A mos 2 3.7584 3.7584 * indicaes ha he null hypohesis is ejeced a he 5% significance level. 24