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

Adil, Masudul Hasan; Hatekar, Neeraj; Fatima, Sana; Nurudeen, Ibrahim; Mohammad, Shan

doi:2022.37.1.93

The Journal of Economic Integration 2022 March;37(1) :93-120.
DOI: https://doi.org/10.11130/jei.2022.37.1.93

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

Masudul Hasan Adil, ¹ Neeraj Hatekar, ² Sana Fatima, ³ Ibrahim Nurudeen, ⁴ Shan Mohammad, ⁵

¹Indian Institute of Technology-Palakkad, India
²University of Mumbai, India
³GLA University, India
⁴Shehu Shagari College of Education, Nigeria
⁵Aligarh Muslim University, India

Corresponding Author: Masudul Hasan Adil ,Email: adilmasood.alig@gmail.com

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.

JEL Classification

E00: General
E4: Money and Interest Rates
E41: Demand for Money
E52: Monetary Policy