Stability of Demand for Money

This is with reference to the paper ‘Experience with Monetary Targeting in India’ by Deepak Mohanty and A K Mitra in EPW (January 16-23, 1999). In the paper the authors evaluate the monetary targeting exercise in India. By using annual data for the period 1953-98 on broad money, WPI and real GDP, the paper suggests that the monetary authority in India should search for a new instrument in conducting monetary policy. Given the changes in the structure of financial sector due to economic reforms and the increase in the international capital transactions, the search for a new instrument is inevitable for the smooth conduct of monetary policy. At this juncture, the present paper is highly contextual and may lead to further serious work in this area.

Having said this about the paper, I have a few comments to make on the conclusions drawn which need to be highlighted for the benefit of monetary policy-makers in this country. My major disagreement with the paper is about the conclusion that money demand is stable in India for the sample period 1953-98. The authors used the recursive estimation procedures of cumulative sum (CUSUM) and cumulative sum of squared residuals (CUSUMSQ) which are mostly used in examining structural breaks in a time series.