The present study is an attempt to test the stability of the demand for money function of business firms in India over the time period 1980-81 to 2004-05. To perform the stability test, the period of liberalization has been considered, and the study period has thus been divided into two sub-periods, viz., 1980-81 to 1990-91 and 1991-92 to 2004-05, i.e., the pre-liberalization period and the post-liberalization period respectively. The study has been conducted at aggregate level for all non-financial firms and at disaggregate level for five industrial groups. The study concludes that the overall demand for money function of the business firms in India has remained stable over time.

Existence of a stable demand function for money is an important building block for many macroeconomic models. In fact, a stable demand function for money has long been perceived as a prerequisite for the use of monetary aggregates in the conduct of (monetary) policy. For an economy undergoing an adjustment program, the existence of a stable money demand function is often regarded, giving hope to policy makers in their search for a target for the monetary aggregates consistent with other policy objectives like price stability.

The ultimate rationale for controlling changes in the quantity of money is to control changes in the aggregate monetary demand for output. Thus conceived, monetary management is essentially a part of aggregate demand management. The objective is to so manage variations in the stock of money that no inflationary or deflationary pressures in the commodity market originate from the money market or get validated by the money market. This requires that the money market is kept in (long-run) equilibrium at stable prices and maximum feasible output. The demand for money cannot be controlled directly by the monetary authority, though it can be influenced to some extent by it. The supply of money, on the other hand, is very much under its control. The aforesaid equilibrium in the money market is to be arrived at and maintained primarily by adopting suitably the supply of money to the demand for it. More specifically, what is required is to keep the stock of money equal to the amount of money demanded at constant prices and maximum feasible output over each long period.

Demand for money is a significant aspect of monetary economics, and money is one of the critical variables that affect and determine the level of aggregate economic activity in the economy. In particular, an accurate understanding and description of the money demand equation is essential for the analysis of past monetary policies and for the formulation of contemporary and future policies. Knowledge of the factors actually determining the demand for money by different sectors in a given economy is helpful in the correct formulation of monetary policy.

Monetary Economics Journal, Business Firms, Post Liberalization Period, Non-Financial Firms, Macroeconomic Models, Monetary Management, Commodity Markets, Money Market, Monetary Policy, Inventory Management, Inventory Theoretic Model, Productive Services, Capital Market, Business Enterprises, Business Sectors, Theoretical Restrictions.