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Monetary aggregates : A consistent message by an inconsistent messenger

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  • Economic and Political Weekly Vol.58; No.13 - 1 April 2023 pp. 58-66
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Summary: An exploration of the information content within money confirms that despite the theoretical inconsistence inherent within a simple sum monetary aggregate, money supply (M3) has been a consistent leading indicator of the general slowdown in economic activities in India since March 2010. The paper also establishes an exogenous influence of the central bank balance sheet over M3 through a statistically stable money multiplier, a long-term stable relationship, and bidirectional Granger causality between M3 and reserve money. However, the monetary policy measures of the central bank that determine reserve money themselves take a cue from economy-wide factors, as presented in a multivariate forecast model for reserve money.
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An exploration of the information content within money confirms that despite the theoretical inconsistence inherent within a simple sum monetary aggregate, money supply (M3) has been a consistent leading indicator of the general slowdown in economic activities in India since March 2010. The paper also establishes an exogenous influence of the central bank balance sheet over M3 through a statistically stable money multiplier, a long-term stable relationship, and bidirectional Granger causality between M3 and reserve money. However, the monetary policy measures of the central bank that determine reserve money themselves take a cue from economy-wide factors, as presented in a multivariate forecast model for reserve money.

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