Divisia Monetary Aggregates for India

In this paper, we are motivated by the fast growing literature that investigates the performance of Divisia monetary aggregates. We construct Divisia monetary aggregates for India using monthly data form January 2001 to March 2020 and present a comprehensive comparison across the Indian Divisia monetary aggregates at four levels of monetary aggregation, M1, M2, M3, and M4. We do so in the context of three classes of empirical models. In particular, we compute correlations between the cyclical components of the Divisia monetary aggregates and the cyclical component of the industrial production index. We test for Granger causality running from the Divisia monetary aggregates to industrial production. We also test for time-varying Granger causality. We find that the levels of the Divisia monetary aggregates Granger cause economic activity in India during normal times, but the causal link broke during and in the aftermath of the extremely unusual circumstances of the Covid-19 crisis.