Estimation of Long-run Demand for Money, and its relation to Capital Markets: Revisited; and the Implications to Current Monetary Policy Issues of India and other countries

By employing the statistical tools, the cointegration analysis and the adjustment matrices, the Vector error Correction models, it is established that there is a statistically significant long-run demand function for real narrow money in India. The sign of the coefficient of the real stock prices is positive and statistically significant corroborating the wealth effect. Similarly, for the real broad money demand function, the statistical tests results corroborate existence of a long-run demand for broad money. But, unlike the demand for narrow money, the real stock prices have negative sign and statistically significant in the VECM vector, indicating a substitution effect of reducing the demand for broad money when real stock prices increase. Apart from the capital and money markets, and the real GDP, the foreign exchange markets also have a role in determining the real money demand .Therefore, the money has not withered away despite financial innovations, and the monetary aggregates should be again recognized as important monetary policy indicator variables in India and other developing countries ..