The Determinants of Demand for and Supply of Money in Bangladesh

This is an empirical study of demand for and supply of money in Bangladesh for the period 1976-2008. Estimates were obtained for the whole period as well as for the two sub-periods, 1976-1990 and 1991-2008. The first period is known as the pre-liberalisation period characterised by highly regimented interest rate, while the second period is known as the post-liberalisation period that saw greater flexibility in interest rate. The study showed that the money demand function was converging towards the Keynesian specification with the passage of time. It was also observed that there was a structural break between the two periods. The problem of autocorrelation was investigated and autocorrelation corrected estimates were presented. The stability of the money demand function was looked into using the techniques of time series econometrics and results showed that although there was short-run instability; stability existed in the long-run. The causality study showed that income Granger caused money supply, which was consistent with growing money supply of the Bangladesh Bank. This study thus provides a comprehensive picture of money demand and money supply in Bangladesh for this period.