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Household Demand for Money in an Underdeveloped Economy. A Case Study of India

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  • PREM S. LAUMAS

    (Northern Illinois University, DeKalb.)

  • MARTIN WILLlAMS

    (Northern Illinois University, DeKalb.)

Abstract

The paper tries to overcome some of the empirical problems that are associated with the estimation of demand-for-money function in an underdeveloped economy. It deals explicitly with the choice of functional form and inclusion of interest rate as an explanatory variable to serve as opportunity cost of holding money in the money-demand function using both narrow and broad defmitions of money. The paper concludes that short- or long-period interest rates serve as an opportunity cost of holding money in India only when a narrow defmition of money is used. Time deposits were found to be sensitive to the maturity structure of fmancial instruments. As regards the choice of functional form, the paper holds that it makes no difference whether the function is estimated by linear form or by log-linear form. The paper also confirms for Iridia the results of Friedman's seminal study for the United States.

Suggested Citation

  • PREM S. LAUMAS & MARTIN WILLlAMS, 1983. "Household Demand for Money in an Underdeveloped Economy. A Case Study of India," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 22(1), pages 37-46.
    • Handle: RePEc:pid:journl:v:22:y:1983:i:1:p:37-46
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    References listed on IDEAS

    as
    1. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters, in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29, National Bureau of Economic Research, Inc.
    2. H. R. Heller, 1965. "The Demand for Money: The Evidence from the Short-Run Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 79(2), pages 291-303.
    3. Rausser, Gordon C. & Laumas, Prem S., 1976. "The stability of the demand for money in Canada," Journal of Monetary Economics, Elsevier, vol. 2(3), pages 367-380, July.
    4. Michael J. Hamburger, 1966. "The Demand for Money by Households, Money Substitutes, and Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 74(6), pages 600-600.
    5. David Laidler, 1966. "The Rate of Interest and the Demand for Money--Some Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 74(6), pages 543-543.
    6. Laumas, Prem S, 1978. "Monetization, Economic Development and the Demand for Money," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 614-618, November.
    7. Laumas, Gurcharan S. & Laumas, Prem S., 1976. "The permanent income hypothesis in an underdeveloped economy," Journal of Development Economics, Elsevier, vol. 3(3), pages 289-297, September.
    8. David Laidler, 1966. "Some Evidence on the Demand for Money," Journal of Political Economy, University of Chicago Press, vol. 74(1), pages 55-68.
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