DEMAND FOR MONEY IN AN OPEN ECONOMY SETTING: A CASE OF INDIA

Since 1970s, just after Monetarists revolution that emphasized the stability of demand for money heavily, there have been numerous studies about demand for money estimation. While some studies showed that interest rate is not a very significant determinant of demand for money, some others pointed out the importance of it especially at very low levels ( a la liquidity trap). None of the studies, however, pointed out the demand for money stability in open economy setting. This paper, by pointing out increased role of international trade in India s economy, estimates the demand for money function in Indian case. The results are interesting, but not very supportive to conclude that external variables determine demand for money behavior. While there are some limitations for Indian case to be completely responsive to monetary sector, more studies are needed to explore this type of demand for money behavior.