Effect of Monetary and Liquidity Aggregates on the Economic Activity in India. (With Abstract)

In this paper, the causal nexus between monetary aggregates with real economic activity (output) and liquidity aggregates with real economic activity output has been empirically examined using Granger causality test in the context of India. Using quarterly data from 1996: Q3 to 2005: Q3, it is found that there is unidirectional Granger causality from monetary aggregates to output as well as liquidity aggregates to output, except for reserve money which shows bidirectional causality. The data is used in the first difference for two alternative definitions of money supply, namely, M0 and M3 and two alternative definitions of liquidity aggregates such as L1 and L2. The result suggests that by altering either the monetary aggregates or liquidity aggregates, the monetary authority can significantly affect the output in the economy.