The Vanishing Role of Money in the Macroeconomy – An Empirical Investigation Based On Spectral and Wavelet Analysis

The recent de-emphasizing of the role of money in both theoretical macroeconomics as well
as in the practical conduct of monetary policy sits uneasily with the idea that inflation is a
monetary phenomenon. Empirical evidence has, however, been accumulating, pointing to an
important leading indicator role for money and credit aggregates with respect to long term
inflationary trends. Such a role could arise from monetary aggregates furnishing a nominal
anchor for inflationary expectations, from their influence on the term structure of interest rates
and from their affecting transactions costs in markets. Our paper attempts to assess the
informational content role of money in the Indian economy by a separation of these effects
across time scales and frequency bands, using the techniques of wavelet analysis and band
spectral analysis respectively. Our results indicate variability of causal relations across
frequency ranges and time scales, as also occasional causal reversals.