Demand for Money in India [1950-51 to 2004-05] - An Econometric Investigation

The demand for money is at the heart of how macroeconomic policies should be conducted effectively. In most of the developed and developing countries, policymakers have frequently questioned whether the money demand is stable over a period of time. According to Friedman the demand for money function is the most stable macroeconomic relation and also one of the most stable and important components in the analysis of economic behaviour. In this paper we have briefly surveyed various theories of demand for money. We have estimated demand for Narrow Money [M1] and Broad Money [M3] functions for Indian economy using annual data covering time period from 1950-51 to 2004-05. In order to determine the relationships between Narrow Money and Broad Money and other important macroeconomics variables such as GDP, Real income [YR], WPI, and Short term interest rate [Sir], we have estimated several estimations involving various combinations viz. linear, log linear, percentage change of these explanatory variables. When we used OLS method for estimation it is found that majority of estimated models are suffering from problem of autocorrelation. To get rid from this problem and for better estimates we have used Cochran-Orcutt a more sophisticated method to solve the problem of autocorrelation.