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Relationship between Money, Output and Price Level in India: A Cointegration and VECM Approach

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Manikandan M.1, Mani N.1, Karthikeyan P.2,*

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Indian Journal of Economics and Development
Year : 2018, Volume : 14, Issue : 1
First page : ( 57) Last page : ( 65) 
Print ISSN : 2277-5412. Online ISSN : 2322-0430.
Article DOI : 10.5958/2322-0430.2018.00005.7

Relationship between Money, Output and Price Level in India: A Cointegration and VECM Approach

Manikandan M.1, Mani N.1, Karthikeyan P.2,*

1Ph. D. Research Scholar, Associate Professor, Department of Economics, Erode Arts and Science College, Erode-638112, Tamil Nadu

2Assistant Professor School of Management Studies, Kongu Engineering College, Erode-638060 (Tamil Nadu)

*Corresponding author’s email: ptp_karthi@yahoo.co.in

JELCodes C32, E31, E40, E51.

Online published on 23 March, 2018.

Abstract

The relationship between money, price, and output is one of the most debated issues among different schools of thought of economics, particularly between the Monetarists and Keynesians. The Monetarists argue that money influences the prices and the output whereas the Keynesians argue that money does not influence the same. Thus, this paper investigates the causal relationships among the three macroeconomic variables. For that purpose, the study has undertaken time series data for the period from 1950–51 to 2012–13. Lag length is selected using standard criteria-LR, FPE, AIC, SC and HQ through VAR estimation. Long run and short run estimates have been investigated by using Johansen Co-integration and Vector Error Correction approaches. Causal relationships among the variables have been observed using Granger causality test. Variance Decomposition Techniques and Impulse Response Functions have been employed for forecasting the variables. The estimation of vector error correction model based on VAR indicates the existence of long-run unidirectional causalities from money supply to output and money supply to the general price level in the long run. However, in the short-run, the bidirectional causality exists between money supply and price level whereas unidirectional causality exists between output and price level. In this study, it is concluded that the impact of money shocks on output and price remains significantly positive

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