Causal Interaction among Money Supply, Price level and GDP in Bangladesh

This paper studies the relationship among monetary policy, income (GDP) and prices in the short-run as well as in the long-run in Bangladesh. In this paper, we use an alternate econometric technique, the Autoregressive Distributed Lag (ADL) approach, which has numerous advantages. This approach can be applied irrespective of whether the variables are integrated of the same order or not. It takes sufficient number of lags to capture the data generation process in a general to specific modeling framework. Moreover, a dynamic error correction model (ECM) for short term relationship, can be derived from ADL through a simple linear transformation. The ECM integrates the short-run dynamics with the long-run equilibrium without losing long-term information. Furthermore ADL approach avoids problems resulting from non-stationary time series data. This paper explores to determine the relationship among money supply, income and price level using the time-series quarterly data of 30 years (1972-2003) for Bangladesh. Examining this relationship is crucial for the country’s economic growth, development and policy making