Abstract
This paper provides an empirical analysis of the stability of demand for money in India using ARDL cointegration framework. The study of stability of money demand plays an important role in deciding the appropriate instruments of monetary policy. The present study examines the demand for money by using annual data over the period 1991-2015. The ARDL model bound test procedure has confirmed that a stable, long relationship exists between M1 and its determinants such as income, interest rates, exchange rates and inflation. Through results we conclude that income elasticity coefficient is positive and significant while the coefficient of inflation and interest rate is negative. Based on the Bahmoni-Oskooee and Pourhedrian (1990) argument, exchange rates negatively affect the demand for money. This study also examines the cointegration in the presence of structural break by using Gregory-Hansen single structural break approach. The study does not find any cointegration in presence of single structural break. Our result also reveals that M1 is stable between the sample period when we incorporated the CUSUM and CUSUMSQ tests.
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