Neutrality of Money Supply in India: A Myth or A Reality

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International Journal of Social Science & Interdisciplinary Research__________________________________ ISSN 2277-3630
IJSSIR, Vol. 4 (4), APRIL (2015), pp. 180-192
Online available at indianresearchjournals.com
NEUTRALITY OF MONEY IN INDIA: A MYTH OR A REALITY
ARCHI BHATIA
RESEARCH SCHOLAR, DEPARTMENT OF ECONOMICS AND PUBLIC POLICY,
CENTRAL UNIVERSITY OF HIMACHAL PRADESH, HIMACHAL PRADESH.
ABSTRACT
The paper aims to study the causal relation between money supply, output, general price level
and interest rate for India. The nature of the causal link has serious implications for the
effectiveness of monetary policy and the monetary policy rule itself (which instrument should be
used to achieve stabilization of output around natural rate and inflation around zero). To
investigate the issue of neutrality of money in the context of Indian economy post liberalization,
four variable vector autoregressive models is developed. Cointegration procedure is applied to
determine whether the system is stable and to draw inferences about long run relationship. The
empirical findings presented in this paper consistently show that evidence based on the post
liberalization Indian experience indicate a close and reliable relationship between money and real
economic activity.
KEYWORDS: Causal link, Cointegration, General Price level, Interest rate, Money supply,
Output.
JEL CLASSIFICATION: C22, E40, E50
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Neutrality of Money Supply in India: A Myth or A Reality

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