A multivariate cointegration approach to the determination of reserves and money balances in India

The objective of this paper is to estimate both long-run reserves and long-run money demand equations using the multivariate cointegration approach. An economic model is constructed, based on the monetary approach to the balance of payments, in which the monetary authorities can control the money supply through changes in bank credit. The vector autoregressive methodology is used to derive latent equilibrium relationships and the short-run error correction equations are estimated for both nominal money stock and reserves. The monthly data for the period 1980 to 1994 are used for several macro variables of the Indian economy in the approach popularized by Johnson (1972).