Money-Price Variability and Asset Prices Volatility: Evidence from India

Abstract

The primary question we seek to address in this paper is does monetary or price stability contribute to asset price stability. The literature in this regard, although rich and growing, is not yet settled with there being still no clear consensus on how one affects the other. Given the evidence of a stabilizing monetary policy and stable headline prices in the post-reform period since the mid -1990s, we argue that Indian economy is a fit case-study to examine such a nexus. Accordingly, we study the impact of money and price variability on asset prices volatility in India. We use data on BSE Sensex to proxy for asset prices and include variability of money supply and wholesale prices as explanatory variables for the volatility of the former. Using monthly data from 1980:04 to 2003:03, and employing alternative methodologies such as GARCH, MA, EWMA to estimate asset prices volatility, we test the hypothesis whether money and price variability have any bearing on asset prices volatility during the sample period as well as during the post-liberalization period alone. We obtain evidence in favour of a nexus between the two phenomena.