Monetary Aggregates, Income and Causality in a Developing Economy

Abstract

This paper uses Sims‐Granger causality to examine the causal relationships between (1) the money stock and income, and (2) the reserve money base and the money stock for India. These relationships are empirically investigated so as to determine the role of money in economic activity and the role and channels of monetary policy in a developing economy. Both the conventional regression method used by Sims and the more recent time‐series method developed by Box and Jenkins are utilised in the tests. The results indicate (a) that money does not play a causal role in economic activity while conventional money‐demand functions with income as the right‐hand side variable are vindicated, and (b) there is weak support for the Central Bank's alleged control over the money stock through control over the reserve money base. The differing nature of the results with respect to the two methods adopted point towards the sensitivity of the Sims‐Granger causality test to the type of filtering procedure chosen.

Citation

Kamath, S. (1985), "Monetary Aggregates, Income and Causality in a Developing Economy", Journal of Economic Studies, Vol. 12 No. 3, pp. 36-53. https://doi.org/10.1108/eb002599