Empirical Evidence on Money-Price Relationship in India: Cointegration and Causality Approach
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Date
2017
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Serial Publications Pvt.Ltd.
Abstract
In recent years, the study of the causal relationship between money supply and price level has attracted the attention of economists, researchers, and policy makers. This study shall be significant in deciding whether price stability is the primary objective of monetary policy in India. Using the sample data on consumer price index and broad money supply for the period 1950-51 to 2015-16, this study provides the evidence of long-run equilibrium relationship between money and general price level. It further suggests the existence of unidirectional causality running between money supply to general price level in the long-run. And, also confirms the presence of bidirectional causal relationship between money and price in the short-run. But it is very interesting. The causality from money supply to price is positive whereas in the reverse direction it is negative. Thus, any increase in money supply would raise the rate of inflation and hence, price stability should be considered as the primary objective of monetary policy in India. On the contrary, rising inflation can be controlled through curtailed money supply implementation of appropriate monetary policy in the country.
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Keywords
Money Supply, Price, Cointegration, Granger Causality, Error Correction Model
Citation
Mishra, P.K., and Verma, J. K., (2017): Empirical Evidence on Money-Price Relationship in India: Cointegration and Causality Approach, International Journal of Economic Research, 14(4): 133-144