Exogeneity of Money and its Policy Implications for Price Control: Evidence from South Asia

We investigate the policy role that could be assigned to money stock in controlling the price level in four South Asian countries, namely, India, Nepal, Pakistan and Sri Lanka. The problem of policy assignment associated with the Granger non-causality tests is pointed out. Various forms of exogeneity are tested. Money stocks (M1 and M2), consumer price index (CPI) and real GDP are cointegrated and causally related but we find overwhelming evidence of endogeneity of money. The endogeneity of money does not support the authorities’ policy stance of controlling price level through the control of money stock