The Demand for Money in Bangladesh During 1975-1997: A Cointegration Analysis

This paper investigates the existence of a long run money demand function for Bangladesh during the period 1975-1997 using the cointegration and error correction modelling approach. It also examines the parameter stability of the money demand function. The empirical results suggest that there exists a unique long-run relationship between real broad money balance, real GDP, and the real exchange rate. The short- term dynamic behaviour of money demand has been investigated by estimating an error correction model in which the error correction term has been found to be correctly signed and statistically significant. Real GDP and the real exchange rate have emerged as important determinants of the demand for money in Bangladesh. Our results provide no evidence of a structural break in the money demand function in the post-liberalisation period in Bangladesh.