Long run demand for money in India: A cointegration approach

Demand for money plays a pivotal role in determining the welfare implications of monetary policy actions in an economy. This study estimated the demand for money in India and investigated various determinants of demand for money for the period 1970 to 2009. The study utilized Johansen-juselius cointegration analysis to test for the existence of a long run relationship between the variables and an Error Correction method is then used. The study concluded that the income and price has a positive effect on the demand for money. On the other hand, interest rate and exchange rate has a negative. The income elasticity is 1.98 and showing significant, implying that in India, a one percent economic growth requires around 1.98 percent increase in the nation's money supply.