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

Author

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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.

Suggested Citation

  • Akhtar Hossain, 2006. "The Money Demand Behaviour in Bangladesh, 1973-2003: An Application of the Cointegration and Error-Correction Methods," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 41(1), pages 55-80, July.
    • Handle: RePEc:dse:indecr:v:41:y:2006:i:1:p:55-80
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    Citations

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    Cited by:

    1. Hossain, Akhand Akhtar, 2010. "Monetary targeting for price stability in Bangladesh: How stable is its money demand function and the linkage between money supply growth and inflation?," Journal of Asian Economics, Elsevier, vol. 21(6), pages 564-578, December.
    2. Kundu, Nobinkhor & Mollah, Muhammad Musharuf Hossain, 2014. "Empirical Approaches to the Post-Keynesian Theory of Demand for Money: An Error Correction Model of Bangladesh," MPRA Paper 65727, University Library of Munich, Germany, revised 14 Oct 2014.
    3. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.

    More about this item

    Keywords

    Money demand; Cointegration; Stability; Financial reforms;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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