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RELATIONSHIP BETWEEN STOCK PRICES, EXCHANGE RATE AND THE DEMAND FOR MONEY IN INDIA

RELATIONSHIP BETWEEN STOCK PRICES, EXCHANGE RATE AND THE DEMAND FOR MONEY IN INDIA This paper investigates the relationship between stock prices, exchange rate and demand for money in India during the period of post liberalization in India. The objective of the paper is two-fold. First, the study aims to shed light on the co-integrating properties of different monetary aggregates, stock prices, exchange rate, interest rate, economic activity, and inflation in India. Specifically, the purpose is to determine whether there is a stationary long run relationship between demand for different monetary aggregates and their determinants. Secondly, the study investigates the stability of the long run money demand function with its determinants. For the analysis, monthly data from 1996:1 to 2010:8 is used. The study employs the Johansen and Juselius Co-integration (1990) approach for checking the long run integration among the variables along with VECM model. Further, Granger Causality test is carried out. The test results discloses the presence of more than two co-integrating vector for each money demand specification. The long run elasticity of demand for money reveals that money demand function is sensitive to inflation, stock prices and economic activity. Unidirectional causality is reported from stock prices and exchange rate to demand for money function. JEL Classification: C32, E41, E44, E51 Keywords: demand for money, stock prices, monetary aggregates, exchange rate, co-integration, Granger Causality http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economics, Management, and Financial Markets Addleton Academic Publishers

RELATIONSHIP BETWEEN STOCK PRICES, EXCHANGE RATE AND THE DEMAND FOR MONEY IN INDIA

JYOTI KUMARI
Economics, Management, and Financial Markets , Volume 7 (1): 22 – Jan 1, 2012
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Publisher
Addleton Academic Publishers
Copyright
© 2009 Addleton Academic Publishers
ISSN
1842-3191
eISSN
1938-212X
Publisher site
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Abstract

This paper investigates the relationship between stock prices, exchange rate and demand for money in India during the period of post liberalization in India. The objective of the paper is two-fold. First, the study aims to shed light on the co-integrating properties of different monetary aggregates, stock prices, exchange rate, interest rate, economic activity, and inflation in India. Specifically, the purpose is to determine whether there is a stationary long run relationship between demand for different monetary aggregates and their determinants. Secondly, the study investigates the stability of the long run money demand function with its determinants. For the analysis, monthly data from 1996:1 to 2010:8 is used. The study employs the Johansen and Juselius Co-integration (1990) approach for checking the long run integration among the variables along with VECM model. Further, Granger Causality test is carried out. The test results discloses the presence of more than two co-integrating vector for each money demand specification. The long run elasticity of demand for money reveals that money demand function is sensitive to inflation, stock prices and economic activity. Unidirectional causality is reported from stock prices and exchange rate to demand for money function. JEL Classification: C32, E41, E44, E51 Keywords: demand for money, stock prices, monetary aggregates, exchange rate, co-integration, Granger Causality

Journal

Economics, Management, and Financial Markets – Addleton Academic Publishers

Published: Jan 1, 2012

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