The IUP Journal of Applied Economics
Financial Innovation and Stability of Money Demand Function in India: Do Equity Derivatives Matter?

Article Details
Pub. Date : Oct, 2018
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE21810
Author Name : V V Subba Rao and Debashis Acharya
Availability : YES
Subject/Domain : Economics
Download Format : PDF Format
No. of Pages : 14



This paper revisits the issue of money demand stability in the Indian context by using some variables capturing financial innovation such as equity futures, equity options, and total equity derivatives in a set of money demand specifications. The ARDL bounds test approach to cointegration is employed and a long-run relationship is found in money demand models, including equity futures, equity options and total equity derivatives, in quarterly data spanning from 2001 to 2014. The coefficients of all the derivative variables bear positive signs, indicating the presence of wealth effect.


Estimation of a standard demand for money function involves the inclusion of a scale variable like income and an opportunity cost variable like interest rate. In the advent of financial innovations in different dimensions such as new assets/instruments, new services, new payment systems, etc., in the emerging market economies, the demand for money function has been re-estimated by scholars employing variables that proxy financial innovation.

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