DEFINITION AND MEASURES OF MONEY SUPPLY

Indian economists use the terms ‘money’, ‘money supply’ and ‘money stock’ synonymously. The literature on definition of money supply reflects intellectual discourses and dialogues among econ­omists, which need concrete shapes in the form of measures of money supply, because concrete measures of money supply are more useful than abstract concepts for the purposes of modelling and forecasting.

The Reserve Bank of India (RBI) is following the simple sum procedure of measuring money supply in its compilation of monetary aggregates. The RBI publishes data on M₁, M₂, M₃ and M₄ and not on the Divisia index. Here

M₁ = currency with public + demand deposits with the banking system + other deposits with RBI;

M₂ = M₁ + saving deposits with post office sav­ings banks;

M₃ = M₁ + time deposits with the banking sys­tem; and

M₄ = M₁ + all deposits with post office savings banks excluding National Saving Certifi­cates.

For forecasting purpose one has to work with whatever information is available. The evolution of the components of the monetary aggregates from time to time reflects that the classical regression technique will not be able to serve the purpose of long run forecasting, because explanatory variables are changing over time. In this context the ARIMA model having the quality of temporal stability can be more useful. A careful perusal of the literature on money supply would reveal that the number of factors affecting money supply is increasing side by side with progress of research in the field. So there may be other factors also, which are so far not discovered or yet to be dis­covered like simply seasonal cycles in the demand for credit on part of the business community. Existing basic and advanced literatures on time series econometrics like Enders (1995), Patterson (2000), Pindyck and Rubinfeld (1998) and Guj arati (2003) suggest that if requisite data are not avail­able for the variables affecting money supply or all the variables affecting money supply are not known then it is difficult or impossible to explain the movement of money supply using a structural model. Estimation of such a model for money supply may result in so large a standard error as to make most estimated coefficients insignificant and the standard error of forecast unacceptably large. A statistically significant regression equation for money supply may not work out for forecasting purposes, because after running such regression one has to forecast the explanatory variables, which may prove more difficult than forecasting money supply.

that clearly capture the new policy regime where the prices are market determined, role of public sector is limited to a few sectors and monetary policy becomes independent of the fiscal stance.”

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