Association between money supply, price level and economic growth: A causality test in the Indian context

The relation between money supply, price level and economic growth is one of the most important controversies in the economic literature. This paper investigates the relationship between the money supply, price level and economic growth in India over the period 1993–2011. The objective of this paper is to study the direction of causality between money supply, price level and economic growth. The variables used under this study are broad money supply (M3), Gross National Product (GNP), used as a proxy to economic growth; Wholesale Price Index (WPI), used as a proxy to price. The methodology used in this study is cointegration and causality test. Johansen's cointegration and Granger causality test used for the selected variables to examine the cointegration and Causality between the variables. The results reveal that there is uni-directional causality running from money supply to price level and economic growth. Therefore, the empirical evidence from our study supports the quantity theorist's view.