A Review of Empirical Studies on Money Supply at Abroad and in India

Abstract

Amongst the many issues addressed in the economic literature, the money demand has perhaps attracted the most attention. The field of money supply has remained much ignored because of the underlying assumptions that money supply is exogenously determined by the central bank. In fact “In the world where banks use all their reserves, where there is no free reserves, and where both the banks and the public do not undertake any portfolio changes, there is no need to concern ourselves with the money supply. Once we get away from the simple mechanical link between reserves, deposits and money, the supply of money has an independent existence as an economic variable determined by behavior and subject to analysis.” (Fand : 1967). For years there has been continuing debate between two prominent schools of economic thought; Monetarists and Post Keynesians. The debate, which started since the publications of Keynes’ General Theory in mid 1930s, became much heated in the late 1960s’ and in 1970s’. The Monetarist view ‘began to be recognized as a serious challenge to Post Keynesian economics. Monetarists contended that changes in money exert a strong force on aggregate demand, price level and output. The key proposition was that changes in money supply dominate short run influences on price level and on nominal aggregate demand. Bringing in continuity in the debate puts forth an argument about the role of money, which has been based upon the lack of synchronization between transactions receipts and expenditures. In such a case, it is desirable for market participants to hold an inventory of money balances. This argument can be used to develop a model, which delegates a powerful role of money in influencing the nations’ money supply and has an important influence on economic activity. Managing the nation's money supply is essential so as to assist the economy in achieving a high level of employment, output, relatively stable price level and a viable balance of payment.

Now our aim is to review the literature on money supply studies at length at abroad and in India. The First part of this article deals money supply studies at aboard and second part deals with the studies conducted in India.