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Modeling the Dynamics of Money Income from a Vector Correction Model

By Mohammad S Hasan


The purpose of this paper is to re-examine the empirical relationship among alternative monetary aggregates (M1 and M2), output, prices, interest rates and exchange rates in India. The results of a five-variate vector error correction model are indicative of a bi-directional causality between each of the monetary aggregates and prices. Our findings of a feedback relationship make each of the monetary aggregates a poor intermediate target and informational variable. Moreover, contrary to most recent research in this area, the results are supportive of the real business-cycle view and the Keynesian monetary accommodation hypothesis rather than the monetarists’ theory of the business cycle

Topics: H
Publisher: Project Muse
Year: 2010
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