Demand for money: an empirical examination of unsettled issues for India

Abstract

The paper examines the unsettled issues on the demand for money function with a particular reference to India. It uses the annual time series data for the period 1954-55 through 1982-83. A special feature of the study is that it generates a uniform series on the narrow money concept (M1) for the whole sample period, and employs the same for empirical estimation and testing. The principal findings are: a.Both the narrow and wide concepts of money are well explained by the well-known and limited number of arguments in the money demand function. Thus, on this criterion, either definition of money is equally acceptable. b.Permanent income is more relevant than the measured income in the money demand function.c.The ratio of non-agricultural income to agricultural income was found to be irrelevant argument in the money demand function. This, in some sense, argues against the hypothesis of different money demand elasticities with respect to the two components of aggregate incoem. d.Short-term rate of interest has proved to be the relevant interest rate in the money demand function.