ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Money, Output and Prices-A Macro Econometric Model

Money, Output and Prices A Macro Econometric Model C Rangarajan R R Arif This paper presents an econometric model of the Indian economy which emphasises the interrelationships among money, output and prices. The main linkages in the model are as follows: The stock of money varies endogenously through the feedback from reserve money which changes to accommodate fiscal deficits. The price level is determined by money supply and output. The government budget is affected by the price level and output. The latter is influenced, among other factors, by changes in real money supply acting as a proxy for real credit. The empirical results show that the price effects of an increase in money supply are stronger than the output effects. Since govern- ment revenue collections do not keep pace with government expenditures as nominal incomes rise, the resource gap widens during a period of continued price increases. The policy simulations show that while a substantial increase in government capital expenditures increases output, its impact on output and prices also depends on the extent of the resource gap met by borrowing from the Reserve Bank. As the proportion of the resource gap met by borrowing from the Reserve Bank increases, the trade-off between output and prices worsens sharply Introduction THE role of money and monetary policy in the determination of real output and price level is increasingly receiving a( tent ion. Empirical research on the factors influencing economic growth includes several attempts to develop econometric models of the Indian economy. Beginning with simple models, empirical research has made considerable progress in the study of the structure and functioning of various sectors of the economy. In recent years, a greater emphasis on policy issues is also' observed. The models differ in their approach and focus. In some models the emphasis is on production and supply while in others it is on demand factors. Some studies pay special attention to the government sector; some recent attempts focus on the interrelationship among money, output and prices and the identification of the sources of growth and inflation. Some of the recent studies in this area are indicated in the list of references at the end of the paper.

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