Interpreting the Relation of Money, Output and Prices in India (1991:2008)

This study investigates the long-run neutrality of money using monthly data for India for the post-reform period 1991:1 to 2008:12. Seasonal integration and cointegration methodology have been applied on both narrow and broad money, real output and prices to test the money neutrality hypothesis. The empirical results of cointegration show that both narrow and broad money do effect real output at seasonal frequencies but at zero frequency, which can be interpreted as the long run, money does not affect real output. Money is neutral in the long run, but not in the short run. The cointegration result also confirms that both narrow and broad money affect prices at seasonal as well as at zero frequency.