The Dynamics of Relationship between Money and Income in India

In any economy money and income are important macro-economic variables which play a significant role in influencing economic activities. Thus, this paper is an attempt to investigate the short-run and long-run dynamics of the relation between money and income in a developing country like India for the period 1950-51 to 2008-09. The study uses the annual data on money supply and national income for the sample period and makes the empirical analysis. Applying popular time series econometric techniques of cointegration and vector error correction model, provides the evidence that the Keynesian type of short-run causality from income to money does not hold good in India over the sample period. But such causality holds in the long-run. Moreover, the Monetarist type of causality from money to income does not hold good in the long-run. And, it is very interesting to note that the causal relation runs from money to income in the short-run which supports the Rational Expectation Approach that short-run unanticipated change in money supply may have a role in determining the growth of output