Demand for Money in India: An ARDL Approach

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.