An empirical analysis of money supply, inflation and output: the case of India

Economists describe the theory of money in different ways. The classical and Keynesian economists' theories are contradictory in their approach towards money neutrality. The contradictory views of classical and Keynesian economists are studied and the relationship amongst money supply, GDP and inflation are examined. We empirically examine which of the two economic theories describes the relationship between the three variables in the Indian economy. Our study concludes that money supply and inflation have positive and negative effects on GDP. Money supply and inflation have no impact during the short-term. The Keynesian economic theory of money is applicable in the context of the Indian economy. The fiscal and monetary policies can be designed to stimulate growth by increasing government spending, reducing taxes and interest rates.