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The Money Demand Behaviour in Bangladesh, 1973-2003: An Application of the Cointegration and Error-Correction Methods

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  • Akhtar Hossain

    (School of Economics, Politics and Tourism, The University of Newcastle NSW 2308, Australia)

Abstract

By applying the methods of cointegration and error-correction, this paper investigates the money demand behaviour in Bangladesh with annual data for the period 1973 to 2003. The empirical results suggest that real money balances (narrow or broad), real permanent income and the deposit rate of interest formed a cointegral relationship for the sample period of study. The dynamic money demand behaviour has been investigated by estimating an error-correction model within a general-to-specific modelling framework. The preferred error-correction model has been found stable. Having identified a stable money demand function, the paper has examined whether there was any structural break in the long-run money demand function during the sample period of study. For this purpose, the Quandt Likelihood Ratio test has been conducted for the period 1982 to 1993 when most financial deregulation and reform measures were undertaken. The test results suggest that there was a structural break in the narrow money demand relationship in 1987 and that there was a structural break in the broad money demand relationship in 1983.

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Bibliographic Info

Article provided by Department of Economics, Delhi School of Economics in its journal Indian Economic Review.

Volume (Year): 41 (2006)
Issue (Month): 1 (July)
Pages: 55-80

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Handle: RePEc:dse:indecr:v:41:y:2006:i:1:p:55-80

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Keywords: Money demand; Cointegration; Stability; Financial reforms;

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