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Relationship between Money, Output and Price Level in India:A Granger Causality Approach


Affiliations
1 Department of Economics, Erode Arts & Science College, Erode, Tamil Nadu, India
2 School of Management Studies, Kongu Engineering College, Erode, Tamil Nadu, India
 

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The relationship between money supply, income and prices is still a contentious concern mostly between the Keynesians and Monetarists. The Keynesians emphasise that a change in income reflects changes in money through demand for money, which means that there exists a unidirectional causality from income to money without any criticism. The Monetarists claim that money is the most important cause leading to changes in income and prices. Therefore, the direction of causation runs from money to income and prices without any feedback. This article studies the association between these macroeconomic aggregates using time series method of pair wise Granger causality test on annual data of the Indian economy over the period 1950-51 to 2012-13. Lag length is favoured by using standard criteria through VAR estimation. The Monetarists view is strongly supported by the result of this study. It is understood from the paper that the monetary policy has a force on the Indian macroeconomic variables as there is a casual relationship between money supply to inflation and income. Nevertheless, these relationships of variables are sensitive to lag length selections.

Keywords

Pair Wise Granger Causality, VAR Lag Order Selection Criteria, Augmented Dickey Fuller (ADF) Test, Phillips-Perron (PP) Test.
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  • Relationship between Money, Output and Price Level in India:A Granger Causality Approach

Abstract Views: 238  |  PDF Views: 158

Authors

M. Manikandan
Department of Economics, Erode Arts & Science College, Erode, Tamil Nadu, India
N. Mani
Department of Economics, Erode Arts & Science College, Erode, Tamil Nadu, India
P. Karthikeyan
School of Management Studies, Kongu Engineering College, Erode, Tamil Nadu, India

Abstract


The relationship between money supply, income and prices is still a contentious concern mostly between the Keynesians and Monetarists. The Keynesians emphasise that a change in income reflects changes in money through demand for money, which means that there exists a unidirectional causality from income to money without any criticism. The Monetarists claim that money is the most important cause leading to changes in income and prices. Therefore, the direction of causation runs from money to income and prices without any feedback. This article studies the association between these macroeconomic aggregates using time series method of pair wise Granger causality test on annual data of the Indian economy over the period 1950-51 to 2012-13. Lag length is favoured by using standard criteria through VAR estimation. The Monetarists view is strongly supported by the result of this study. It is understood from the paper that the monetary policy has a force on the Indian macroeconomic variables as there is a casual relationship between money supply to inflation and income. Nevertheless, these relationships of variables are sensitive to lag length selections.

Keywords


Pair Wise Granger Causality, VAR Lag Order Selection Criteria, Augmented Dickey Fuller (ADF) Test, Phillips-Perron (PP) Test.

References





DOI: https://doi.org/10.17492/pragati.v4i02.11471