Financial Innovation and Stability of Money Demand Function in Post–reform period in India

Abstract

Innovation in financial sector, financial reforms and changes in the policy environment are the factors responsible for instability in the money demanded in an economy. The dawn of 1991 balance of payment crisis in India brought much needed reforms in the economy and financial sector and triggered financial innovation fueled with revolution in information technology world wide and in India. In this backdrop this paper attempts to take a meticulous look on stability of money demand in India with quarterly data for 1996–97:1–2009–10:3 period. Based on Gregory–Hansen (1996) method of co–integration estimation the analysis confirms that in contrast to most of the previous studies, money demand function in India is not stable in the post reform period.Financial Innovation, Money Demand, Co–integration with Structural Break, Stability