The Behaviour of Income Velocity of Money in India : Institutional, Structural and Socio-Demographic Determinants

The income velocity of money measured as the ratio of GDP at current market prices to money stocks - M1 and M3 - is found to display the characteristics of random walk during 1950-51 to 1992-93. Accordingly,  effort has been directed towards searching for an appropriate functional specification for velocity, which accounts for influence of institutional structural and Socio-demographic changes presumed to affect the velocity behaviour. The empirical results derived from alternative specification of velocity equations reveal that failing to take the cognisance of institutional, structural and Socio-demographic variables may produce an upward biased income elasticity of demand for money. Hence, this study arrived at the conclusion that the virtual decline in velocity when real income rises may be taken to suffer from the errors of ignored variables which act as potential shifters of demand for money.