Currency demand stability in the presence of seasonality and endogenous financial innovation: Evidence from India

MPRA Paper from University Library of Munich, Germany

Abstract: Based on the money-in-the-utility function, this paper intends to examine the stability of the currency demand function for India with real private consumption expenditure, tax-GDP ratio and deposit rate as explanatory variables by applying the seasonal cointegration technique developed by EGHL (1993) and HEGY (1990) for the period 1996:1 to 2014:4. The empirical findings show that there is absence of long-run cointegrationg relationship among the variables at the zero and annual frequency, however, there is evidence of a relationship among the variables at the biannual frequency. Moreover, the time-varying coefficient of deposit rate elasticity, used to test the Gurley-Shaw hypothesis, suggests that innovations in financial markets, especially improvements in the payment technology, raises the deposit rate elasticity, beginning from 2010 onward.

Keywords: Currency demand; Seasonal cointegration; Seasonal error correction; Financial innovation; State-space Modeling (search for similar items in EconPapers)
JEL-codes: E51 O3 (search for similar items in EconPapers)
Date: 2016-01-01
New Economics Papers: this item is included in nep-mac, nep-mon and nep-upt
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