A step by step approach to estimate the money demand of India and China.

1. ESTIMATE THE MONEY DEMAND
FUNCTION FOR INDIA AND
CHINA
Group B7
Amrita Sarkhel(2016071)
Manas Malhotra(2016087)
Sankul Ubbott(2016107)
Sayan Pal(2016110)
Shagun Anand(2016111)
Sonali Jha(2016115)
Tapobrata Majumdar(2016118)
GOA INSTITUTE OF
MANAGEMENT

2. Motivation
 To study the practical implementation of the money demand
function and how strongly demand for money is correlated to
changes in interest rates and national income
 To have a better understanding of the policies of government so
that as budding managers we can plan business strategies
accordingly
 To study the variation in money demand function of two developing
countries, India and China

3. Outline
 We are estimating the money demand of India and China for the last 21 years (1995-2015)
 We are using the below function for our calculation:
L(Y, r) =
𝑀
𝑃
𝑑 = L0 + L1 Y − L2 𝑟 [1]
M= M1= Money Supply
P= Price level
Y= Real GDP at market price
r= Call Money Rate
L0=Autonomous demand
L1= Income sensitivity of money demand
L2= Interest sensitivity of money demand
 Comparing the behavior of money demand function w.r.t GDP and Interest Rate
 We have extracted data from different sources for GDP(USD Billions), M1(USD Billions),
Interest rate( Call money rate%) and CPI and then we have done a regression analysis with
dependent variables being Real money demand and independent variable being GDP and
interest rate
[1] Das-Gupta, Arindam, Professor. "ISLM Model." 7 Nov. 2016. Lecture

4. Sample Data for
India
• The money demand is estimated
linearly using regression and checked
at 5% level of significance
• Real GDP is taken at the end of the
year with base year as 2005
• Money supply is taken on monthly
average
• Money supply is divided by CPI to get
real money balance
• Interest rate is money call rate and it is
average of months
• CPI is taken as monthly average
SOURCES: Real GDP- International Monetary Fund, USA
CPI & M1- Trading Economics
Interest Rate – OECD Database

5.  L = 2.043+ 0.001Y – 0.130r (at equilibrium)
From the above statistical analysis , we can derive the money demand function of India as:

6. Sample Data for China
• The money demand is
estimated linearly using
regression and checked at
5% level of significance
• Real GDP is taken at the end
of the year with base year as
2010
• Money supply is taken on
monthly average
• Money supply is divided by
CPI to get real money
balance
• Interest rate is money call
rate and it is average of
months
• CPI is taken as monthly
average
SOURCES: Real GDP- International Monetary fund, USA
CPI & M1- Trading Economics
Interest Rate – OECD Database

7. From the above statistical analysis , we can derive the money demand function of
China as:
 M/P = 5.2440 + 0.005Y – 0.553r (at equilibrium)

8. Comparison
 The Autonomous Demand (L0) is
lower for India (2.04) than
China(5.24)
 The income sensitivity of
demand for real money ( L1) is
lower for India (0.001) than China
(0.004)
 Interest sensitivity of demand for
real money (L2) is lower for India
(0.12) than china (0.55)

9. Conclusions
■ Both the money demand functions of China and India are conforming with the
theoretical demand function i.e.
• Money demand is directly proportional to real GDP
• Money demand is inversely proportional to interest rate
■ For both the countries, real money demand rises less than proportionately than
the rise in real income

10. Key Learnings
 Money demand function varies from country to country based on various macro-
economic variables of the country
 Practical implementation of regression analysis
 Since the slope of the LM curve for India is steeper any changes in fiscal policy
will be less effective as compared to China.

11. Data Sources
 Monthly Monetary and Financial Statistics (MEI) : Interest rates. (2016, November 06). Retrieved
November 07, 2016, from http://stats.oecd.org/index.aspx?queryid=86
 Consumer Price Index for India. (2016, November 01). Retrieved November 07, 2016, from
https://www.quandl.com/data/FRED/DDOE02INA086NWDB-Consumer-Price-Index-for-India.
 International Monetary Fund (GDP at constant prices). (2016, October). Retrieved November 07,
2016, from
http://www.imf.org/external/pubs/ft/weo/2016/02/weodata/weoseladv.aspx?a=&c=534&s=NGDP_
R
 India Money Supply M1. (2016, November). Retrieved November 07, 2016, from
http://www.tradingeconomics.com/india/money-supply-m1
 China GDP. (2016, December). Retrieved December 03, 2016, from
http://www.tradingeconomics.com/china/gdp
 Monthly Monetary and Financial Statistics (MEI) : Interest rates. (2016, December). Retrieved
December 04, 2016, from http://stats.oecd.org/index.aspx?queryid=86#
 China Inflation Rate. (2016, November 9). Retrieved December 4, 2016, from
http://www.tradingeconomics.com/china/inflation-cpi

12. References
Readings:
 Das-Gupta, Arindam, Professor. "ISLM Model." 7 Nov. 2016. Lecture
 Mankiw, G. N. (2010). Principles of Macroeconomics, Seventh Edition (7th ed.). New York: Worth.
 Dornbusch, R., Fischer, S., & Startz, R. (2015). Macroeconomics (Indian Edition)(Eleventh ed.,
11e). New Delhi: Mc Graw Hill Education (India).
Papers:
 Takashi, I., & Shigeyuki, H. (2008, September). An Empirical Analysis of the Money Demand
Function in India. Retrieved November 7, 2016, from
http://www.ide.go.jp/English/Publish/Download/Dp/166.html
 Basutkar, T. (2016, April 05). Money Demand in India. Retrieved November 8, 2016, from
https://mpra.ub.uni-muenchen.de/70495/1/MPRA_paper_70495.pdf
 Omer, M. (2015, September 24). Stability of money demand function in Pakistan. Retrieved
November 8, 2016, from https://mpra.ub.uni-muenchen.de/35306/
 Gerlach, S., & Kong, J. (2005, March). Money and Inflation in China. Retrieved December 5th,
2016, from http://www.hkma.gov.hk/media/eng/publication-and-research/research/working-
papers/pre2007/RM04-2005.pdf

13. THANK YOU !