An Analysis of the Relationship between Inflation, Money Supply, and Output in India

Abstract

Economists have been fascinated by the interrelatedness between money supply, output, and prices for ages. On one hand, some economists believe that money supply impacts both the level of output and the prices. On the other hand, some economists opine that there exists no relationship between these three macro- economic variables. This paper investigates the connections between these three macroeconomic factors in the context of India. The effect of total output and money supply on the rate of inflation, over the short and long term has been examined using the Auto Regressive Distributed Lag (ARDL) Model. Long-term research has shown that the amount of output and the supply of money does not have any impact on the price level. The output level and inflation rate do, however, have a direct positive association in the short run, but after a certain point, a continued increase in the amount of output has a negative bearing on prices. The inflation rate is unaffected by the money supply in the short term.