Money, output and prices in India

Abstract

The dynamics of the monetary system is undergoing significant changes in India. The entire concept and flow of money; narrow, broad or base, is being influenced by measures related to financial inclusion and also behavioural changes with respect to the increase in usage of plastic money and other payment methods. Given this context, the paper aims to re-examine relationship between money supply, output and prices in the short and long-term. Different metrics for money, output and prices are used to understand the relationship between each. Variables to understand food inflation is especially used considering the fact that food prices are less income elastic and are viewed differently by citizens. The findings indicate that the relationship is sensitive to the choice of variable.