A Review of Empirical Studies on Money Supply at Abroad and in India

Amongst the many issues addressed in the economic literature, the money demand has perhaps attracted the most attention.The field of money supply has remained much ignored because of the underlying assumptions that money supply is exogenously determined by the central bank.In fact "In the world where banks use all their reserves, where there is no free reserves, and where both the banks and the public do not undertake any portfolio changes, there is no need to concern ourselves with the money supply.Once we get away from the simple mechanical link between reserves, deposits and money, the supply of money has an independent existence as an economic variable determined by behavior and subject to analysis."(Fand : 1967).For years there has been continuing debate between two prominent schools of economic thought; Monetarists and Post Keynesians.The debate, which started since the publications of Keynes' General Theory in mid 1930s, became much heated in the late 1960s' and in 1970s'.The Monetarist view 'began to be recognized as a serious challenge to Post Keynesian economics.Monetarists contended that changes in money exert a strong force on aggregate demand, price level and output.The key proposition was that changes in money supply dominate short run influences on price level and on nominal aggregate demand.Bringing in continuity in the debate puts forth an argument about the role of money, which has been based upon the lack of synchronization between transactions receipts and expenditures.In such a case, it is desirable for market participants to hold an inventory of money balances.This argument can be used to develop a model, which delegates a powerful role of money in influencing the nations' money supply and has an important influence on economic activity.Managing the nation's money supply is essential so as to assist the economy in achieving a high level of employment, output, relatively stable price level and a viable balance of payment.Now our aim is to review the literature on money supply studies at length at abroad and in India.The First part of this article deals money supply studies at aboard and second part deals with the studies conducted in India. Money Supply Studies At AbroadMost investigations of factors affecting the money stock take as a starting point total reserves or some other magnitude which constrains maximum size of the money stock for given reserve requirements (Fand, 1967: 380).In this respect the multiplier plays a crucial role in view that monetary control should be exerted through control of a reserve aggregate such as monetary base.Chester A. Philips (1920) was amongst the very early contributors of the money multiplier theory of money supply.The other contributors were James, Harvey Rogers (1933), James W Angell and Carl F Ficek (1933).Their approach is a major step forward in formulation of the money multiplier theory and Lauchlin Currie (1935) gives an explanation of the supply of money and the degree to which it could be controlled by the Central Bank.The central theme of Currie's work is an extension of the analysis given by Phillips, Rogers, Angell and Ficek.In fact, the credit for an early attempt to formulate behavioural hypothesis about the variables whose change affects the supply of money goes to Currie.Then there was a long gap because of 1930s.Depression and its solution provided by Keynes in the General Theory of Employment Interest and Money in 1936.Lord Keynes was of the view that money is insignificant and only changes in the rate of interest affects economic activities in a very important way.Meltzer, A.H. (1959 : 275-96) investigated the quantitative relationship between the money supply and the central bank monetary liabilities in France for the period 1938-54.He concluded that the banking system operating under fractional reserves would be subject to multiple expansion of money and increase in monetary base will yield multiple expansions in money supply.Empirical evidences prove that a close and stable relationship existed between money supply and monetary base during the period of study.Ahrensdorf J. and S. Kanesathasan (1960 : 126-145) examine some of assumptions that are frequently implicit in monetary models of the economic system.The assumptions is that a central bank can control the money supply in a fairly automatic and reliable fashion by producing changes in the monetary liabilities or by changing legal reserve requirements.They have also examined the stability of money multiplier.The multiplier composes of the ratio of currency to money and of the required reserves plus working reserves to deposits.It is