Complementarity Between Money and Capital in a Developing Economy: A Test of Stability

The author argues that the success of a policy of financial liberalization in stimulating the rate of capital formation depends on the extent to which the demand for money and the investment functions are stable. Time varying parameter technique is used to test alternative specifications of the demand for money and the investment functions. The author concludes that a modified version of the McKinnon hypothesis explains the success of the monetary policy pursued by the Reserve Bank of India during the period under review. [310]