On the Stability of Demand for Money in a Developing Economy-Some Empirical Issues

The success of anti-inflationary stabilization policy depends on the stable demand for money function. Recent developments in econometrics emphasize the need to verify the time series properties of the variables in the demand for money function. In studies with conventional approaches to the estimation of demand for money, this was taken for granted. In this paper, we test for the stability of the demand for money in India. Using cointegration and the corresponding error-correction approach we test for long and short-run relationships respectively. This paper concludes that both narrow and broad measures of money exhibit long-run-stable relationships with real income and the rate of interest. The results presented here have implications for the design of macroeconomic stabilization policy in India.