Determinants of Demand for Money (M 1 ) using Cointegration Approach

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.