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Determinants of Demand for Money (M1) using Cointegration Approach


Affiliations
1 Avinashilingam Institute for Home Science and Higher Education for Women University, Coimbatore: 641043, India
2 Avinashilingam Institute for Home Science and Higher Education for Women University, Coimbatore: 641043, India
 

Estimating the demand for money in an economy and understanding its relationship with various macroeconomic variables is an essential element in the planning of the issue and distribution of currency (Nachane et al., 2013). The penetration of several innovative instruments in the financial sector has changed the behavior and relationship of demand for money. Understanding the significance of estimating money demand function in this evolving financial innovation era, this paper attempts to analyze the major determinants of demand for money via M1 for India for the period 2005-06 to 2014-15. The demand for M1 was estimated applying the Johansen's Cointegration Technique and the estimated results revealed that there existed long run relationship among the explanatory variables of the function, with specific reference to debit cards that form the major substitute for cash in the country. The findings suggests that the financial innovations in the banking sector have influenced the demand for money, specifically M1, indicating that the transaction demand for money in India is influenced by the innovations.

Keywords

Demand for Money, M1, Cointegration Technique, Transaction Demand for Money.
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  • Determinants of Demand for Money (M1) using Cointegration Approach

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Authors

K. P. Radhika
Avinashilingam Institute for Home Science and Higher Education for Women University, Coimbatore: 641043, India
P. Ambiga Devi
Avinashilingam Institute for Home Science and Higher Education for Women University, Coimbatore: 641043, India

Abstract


Estimating the demand for money in an economy and understanding its relationship with various macroeconomic variables is an essential element in the planning of the issue and distribution of currency (Nachane et al., 2013). The penetration of several innovative instruments in the financial sector has changed the behavior and relationship of demand for money. Understanding the significance of estimating money demand function in this evolving financial innovation era, this paper attempts to analyze the major determinants of demand for money via M1 for India for the period 2005-06 to 2014-15. The demand for M1 was estimated applying the Johansen's Cointegration Technique and the estimated results revealed that there existed long run relationship among the explanatory variables of the function, with specific reference to debit cards that form the major substitute for cash in the country. The findings suggests that the financial innovations in the banking sector have influenced the demand for money, specifically M1, indicating that the transaction demand for money in India is influenced by the innovations.

Keywords


Demand for Money, M1, Cointegration Technique, Transaction Demand for Money.

References





DOI: https://doi.org/10.23837/tbr%2F2016%2Fv4%2Fn2%2F128865