Margin—The Journal of Applied Economic Research 4 : 1 (2010): 25–47 SAGE Publications Los Angeles/London/New Delhi/Singapore/Washington DC DOI: 10.1177/097380100900400102 Policy Reforms and Stability of the Money Demand Function in India Muralikrishna Bharadwaj B. Vishwanath Pandit The traditional policy regimes need to be re-examined in the wake of the fast-emerging globalised world economy. This is particularly true in the case of developing economies and more so when it comes to monetary policy. This is because of the growing link between domestic money and financial markets on the one hand and the foreign exchange market on the other. A central building block in this context is the money demand function which must be stable and able to provide adequate linkages for policy formulation. This is the focus of this exercise as it attempts to relate the demand for real stock of money to the ex- change rate, and to other familiar variables like rate of inflation, interest rate and the level of economic activity. The results are significant from the policy point of view under the new economic policy regime. Keywords: Monetary Policy, Demand for Money, India, Income, Interest Rate, Inflation Rate and Exchange Rate, Long-run Stability JEL Classification: E 41 1. INTRODUCTION A clear assessment of how much money the public is likely to hold under different economic situations is a necessary prerequisite for the formulation of an effective monetary policy. This is because the demand for money and its components reflect the nature and quantum of interaction between the monetary sector and real sectors of the economy. Quite clearly, the relationship between the stock of money and the interest rate, level of output, price level and Vishwanath Pandit is Vice Chancellor of the Sri Sathya Sai University and Muralikrishna Bharadwaj B. is at the Department of Economics, Sri Sathya Sai University. The corresponding author is Dr Pandit, Sri Sathya Sai University, Prashanthi Nilayam, Andhra Pradesh 515134, India; e-mail: vnpandit@gmail.com Acknowledgement: The authors are grateful to Mr G. Raghavender Raju for his help and comments. at NANYANG TECH UNIV LIBRARY on May 19, 2015 mar.sagepub.com Downloaded from