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Journal of Quantitative Economics
Published in: Journal of Quantitative Economics 4/2020

27-04-2020 | Original Article

Empirical Assessment of Money Demand Stability Under India’s Open Economy: Non-linear ARDL Approach

Authors: Masudul Hasan Adil, Salman Haider, Neeraj R. Hatekar

Published in: Journal of Quantitative Economics | Issue 4/2020

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Abstract

This study explores stability issues of money demand in the wake of a new economic policy regime of India’s open economy, particularly since the 1990s. The study covers dataset on quarterly frequency from 1996: Q2 to 2016: Q3. In this paper, it is shown that the failure to find a significant relationship between exchange rate and the demand for money—more specifically stable money demand, could be due to the supposition of symmetric adjustment mechanism among variables. Importantly, the asymmetry is introduced in money demand function through partial sum decomposition in the autoregressive distributed lag model. It is found that exchange rate appreciation or depreciation affects the money demand in an asymmetric fashion. Ultimately, the study finds stable money demand in case of India. Further, the exchange rate affects money demand through currency substitution effect; provided the dataset, variables and econometric techniques under study.
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Appendix
Available only for authorised users
Footnotes
1
Present study utilises NEER as a proxy for exchange rate rather than the REER. The rationale behind using NEER is as follows, since REER is inflation adjusted while NEER is inflation unadjusted. Importantly, earlier study (for instance Bhardwaj and Pandit 2010) has taken inflation as one of the explanatory variable in the estimation of MDF. Here, the component of inflation is reflected in NEER rather than REER. Therefore, it is postulated to keep NEER as an explanatory variable in the estimation of MDF in order to get more robust result.
 
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Metadata
Title
Empirical Assessment of Money Demand Stability Under India’s Open Economy: Non-linear ARDL Approach
Authors
Masudul Hasan Adil
Salman Haider
Neeraj R. Hatekar
Publication date
27-04-2020
Publisher
Springer India
Published in
Journal of Quantitative Economics / Issue 4/2020
Print ISSN: 0971-1554
Electronic ISSN: 2364-1045
DOI
https://doi.org/10.1007/s40953-020-00203-1

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