Empirical Assessment of Money Demand Stability Under India’s Open Economy: Non-linear ARDL Approach

This study explores stability issues of money demand in the wake of a new economic policy regime of India’s open economy, particularly since the 1990s. The study covers dataset on quarterly frequency from 1996: Q2 to 2016: Q3. In this paper, it is shown that the failure to find a significant relationship between exchange rate and the demand for money—more specifically stable money demand, could be due to the supposition of symmetric adjustment mechanism among variables. Importantly, the asymmetry is introduced in money demand function through partial sum decomposition in the autoregressive distributed lag model. It is found that exchange rate appreciation or depreciation affects the money demand in an asymmetric fashion. Ultimately, the study finds stable money demand in case of India. Further, the exchange rate affects money demand through currency substitution effect; provided the dataset, variables and econometric techniques under study.