An Empirical Study of Demand for Money in Bangladesh

Abstract

This is an empirical study of demand for money in Bangladesh. It covers the period from 1976 to 2006. The main objective of this thesis was to estimate the demand function of money for the whole period of 1976 to 2006 as well as for the two sub periods of 1976 to 1990, which was the pre liberalization period chracterised by regimented interest rate policy and 1991 to 2006, which was the post liberalization period, which had a more flexible policy of interest. This study also examined the stability property of the money demand function. The empirical results showed that income was the statistically significant determinant while the rate of interest was found insignificant. In a separate estimate of a model that allowed for the short and the long run estimates, the long run estimates of income and interest elasticity were found to be higher than the short run, which were in line with earlier studies. In this study, the stability of demand for money was studied using time series econometric techniques. It was found that although money demand function in Bangladesh was unstable in the short run, there was stability in the long run. Besides these empirical estimates, this study also provided a thorough discussion of monetary background in Bangladesh and an extensive survey of literature on money demand function.