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Demand for Money in India: An ARDL Approach

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Current Issues in the Economy and Finance of India (ICEF 2018 2018)

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Abstract

Understanding the stability of monetary aggregates and different determinants of money demand in an economy is necessary for the planning and implementation of monetary policy because of the sensitivity and importance of money in an economy. This study empirically examines the broad money (M3) money demand function in Indian economy by using a robust Autoregressive Distributed Lag (ARDL ) model suggested by Pesaran et al. (J Appl Econom 16:289–326, 2001). It uses annual data on GDP per-capita, exchange rate and inflation for a period of 41 years from 1975 onwards. The study found a strong co-integration relation between M3 and its determinants for long-run but only the inflation was co-integrated for short-run. It further found that the GDP elasticity & inflation elasticity of money was positive and the elasticity of exchange rate is negative. The result of CUSUM and CUSUMQ confirm a stable money demand in Indian economy and using M3 as the policy yardstick is effective for monetary policy decisions.

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Notes

  1. 1.

    The log-linear specification provides the efficient results as compared to simple specification (Layson 1983; Shahbaz 2010)

  2. 2.

    Narayan (2004) and Pesaran and Shin (1999) argued that the SBC-based ARDL model performs better than the AIC-based model in case of small samples.

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Authors and Affiliations

  1. Department of Accounting and Finance, Central University of Himachal Pradesh, Dharamshala, India

    Abdul Rishad & Akhil Sharma

  2. School of Business and Management Studies, Central University of Himachal Pradesh, Dharamshala, India

    Sanjeev Gupta

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  1. Abdul Rishad
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  2. Akhil Sharma
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  3. Sanjeev Gupta
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Correspondence to Abdul Rishad .

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Editors and Affiliations

  1. Department of Economics, Birla Institute of Technology and Science (BITS), Pilani, Goa, India

    Aswini Kumar Mishra

  2. Trulaske College of Business, School of Accountancy, University of Missouri, Columbia, MO, USA

    Vairam Arunachalam

  3. Department of Economics, Birla Institute of Technology and Science (BITS), Pilani, Goa, India

    Debasis Patnaik

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Rishad, A., Sharma, A., Gupta, S. (2018). Demand for Money in India: An ARDL Approach. In: Mishra, A., Arunachalam, V., Patnaik, D. (eds) Current Issues in the Economy and Finance of India. ICEF 2018 2018. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-99555-7_2

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