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Money Demand Function: A Not-So-Fond Farewell in the Light of Financial Development

Author

Listed:
  • Adil, Masudul Hasan

    (Indian Institute of Technology-Palakkad, India)

  • Hatekar, Neeraj

    (University of Mumbai, India)

  • Fatima, Sana

    (GLA University, India)

  • Nurudeen, Ibrahim

    (Shehu Shagari College of Education, Nigeria)

  • Mohammad, Shan

    (Aligarh Muslim University, India)

Abstract

This study investigates the stability issues of real money balances considering financial development. We estimate real narrow (M1) and broad (M3) money demand in India during the post-financial reform, from 1996:Q2 to 2016:Q3. To check the short- and long-run relationships, this study uses the autoregressive distributed lag model of cointegration and other various time series techniques. After incorporating financial development into money demand, we determined short- and long-run relationships and a well-defined open-economy stable money demand specification (M1 and M3) in India. Having established money demand function, the policymaker and central bankers can use monetary aggregates as an indicator or information variable to predict output gaps and inflationary expectations under the inflation-targeting framework.

Suggested Citation

  • Adil, Masudul Hasan & Hatekar, Neeraj & Fatima, Sana & Nurudeen, Ibrahim & Mohammad, Shan, 2022. "Money Demand Function: A Not-So-Fond Farewell in the Light of Financial Development," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 37(1), pages 93-120.
    • Handle: RePEc:ris:integr:0845
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    Keywords

    inflation-targeting; money demand; financial development; bound testing; cointegration; impulse response;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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