Advances in Economics and Business Vol. 5(9), pp. 495 - 499
DOI: 10.13189/aeb.2017.050902
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Inter-sector GDP Substitutability in Macro-Money Demand: Novel Evidence for India


Subrahmanyam Ganti *, Debashis Acharya
School of Economics, University of Hyderabad, India

ABSTRACT

The gross domestic product (GDP) as a scale variable in the macro-money demand function is justified only on the simplifying but verifiable assumption that the individual-sector GDPs have the same marginal money demand propensities. This assumption is easily verifiable by replacing the aggregate GDP with the services sector and commodity sector GDPs as two scale variables. The money demand propensities differ between these two sectors. To empirically verify this, a variable elasticity of substitution model is posited with these two sector GDPs as scale variables. This novel model permits us to estimate the parameter of elasticity of substitution between the two-sector GDPs .We expect the elasticity estimate to be greater than unity first and decrease towards unity later in the post-liberalization period 1992-2012 and this ensures a unitary income elasticity of demand for money for the aggregate GDP. For the pre-liberalization period (1971 to 1991) we expect the substitutability between the two sectors to be either less than unity or even negative. The policy implication of disparate sector-GDP growth rates for money demand should not be ignored in an emerging economy of India, where the GDP structure evolves towards invariance as in a developing economy.

KEYWORDS
Intersector GDP Substitutability, Macro-money Demand Function, 'Transcendental' Functional Specification

Cite This Paper in IEEE or APA Citation Styles
(a). IEEE Format:
[1] Subrahmanyam Ganti , Debashis Acharya , "Inter-sector GDP Substitutability in Macro-Money Demand: Novel Evidence for India," Advances in Economics and Business, Vol. 5, No. 9, pp. 495 - 499, 2017. DOI: 10.13189/aeb.2017.050902.

(b). APA Format:
Subrahmanyam Ganti , Debashis Acharya (2017). Inter-sector GDP Substitutability in Macro-Money Demand: Novel Evidence for India. Advances in Economics and Business, 5(9), 495 - 499. DOI: 10.13189/aeb.2017.050902.