Do broad money, output, and prices stand for a stable relationship in India? |
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Authors: | M Ramachandran |
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Institution: | Institute for Social and Economic Change, Nagarabhavi, Bangalore 560 072, India |
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Abstract: | This study investigates the stability of the relationship among M3 money, output, and prices. The empirical results derived from conventional stability tests, cointegration and error correction models and a test for structural break in a cointegrating vector provide evidence for the existence of a fairly stable relationship among these variables during 1951–1952 to 2000–2001. The evidence suggests that the growth of M3 money can be used as one of the potential indicators of future movement in prices within the multiple indicators framework of the Reserve Bank of India (RBI). However, evidence regarding the short run dynamic adjustment among these variables indicates that active monetary policy to stabilize short run fluctuation in prices must be handled with caution, as it would amplify rather than moderate price fluctuations in the long run. |
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Keywords: | Money demand Stability tests Structural breaks Cointegration Error correction |
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