Monetary targeting for price stability in Bangladesh: How stable is its money demand function and the linkage between money supply growth and inflation?
Since the mid-1980s Bangladesh has implemented a loose form of monetary targeting under two exchange-rate régimes: a pegged system until May 2003 and a 'managed floating' exchange-rate system. Under both régimes, broad money has been used as an intermediate target to maintain price stability, which implies as the ultimate goal a relatively low and stable rate of inflation. Inflation in this country has, however, remained moderately high and volatile, especially during the 1970s under the pegged exchange-rate system. With the apparent ineffectiveness of the monetary-targeting system in achieving price stability, even following the 2003 'managed float' of the currency, there has been some suggestion that it should be replaced by, say, inflation targeting. This paper forms an element of a fuller study of the issue. It investigates the behaviour of broad money demand in Bangladesh using annual data over the period 1973-2008. Empirical results suggest that an open-economy broad money demand function has remained stable in Bangladesh since the early 2000s. Empirical results also suggest the existence of a causal relationship between money supply growth and inflation. The paper concludes that, although monetary targeting remains appropriate for Bangladesh, its implementation can be made more effective in stabilising the price level if the Bangladesh Bank enhances its control over the money supply by eschewing nominal exchange-rate stabilisation through foreign exchange market interventions.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hayo, Bernd, 1999.
"Estimating a European Demand for Money,"
Scottish Journal of Political Economy,
Scottish Economic Society, vol. 46(3), pages 221-44, August.
- Mohsen Bahmani-Oskooee & Miquel-Angel Galindo Martin & Farhang Niroomand, 1998. "Exchange rate sensitivity of the demand for money in Spain," Applied Economics, Taylor & Francis Journals, vol. 30(5), pages 607-612.
- Holland, A Steven, 1995. "Inflation and Uncertainty: Tests for Temporal Ordering," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 827-37, August.
- Hendry, David F. & Ericsson, Neil R., 1991.
"Modeling the demand for narrow money in the United Kingdom and the United States,"
European Economic Review,
Elsevier, vol. 35(4), pages 833-881, May.
- David F. Hendry & Neil R. Ericsson, 1990. "Modeling the demand for narrow money in the United Kingdom and the United States," International Finance Discussion Papers 383, Board of Governors of the Federal Reserve System (U.S.).
- John B. Taylor, 2009.
"The Lack of an Empirical Rationale for a Revival of Discretionary Fiscal Policy,"
American Economic Review,
American Economic Association, vol. 99(2), pages 550-55, May.
- John B. Taylor, 2009. "The Lack Of An Empirical Rationale For A Revival Of Discretionary Fiscal Policy," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 10(2), pages 9-13, 07.
- Mohsen Bahmani-Oskooee & Raymond Chi Wing Ng, 2002. "Long-Run Demand for Money in Hong Kong: An Application of the ARDL Model," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 1(2), pages 147-155, August.
- Arango, Sebastian & Ishaq Nadiri, M., 1981. "Demand for money in open economies," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 69-83.
- Bahmani-Oskooee, Mohsen, 2001. "How stable is M2 money demand function in Japan?," Japan and the World Economy, Elsevier, vol. 13(4), pages 455-461, December.
- Gerlach, Stefan & Svensson, Lars E. O., 2003.
"Money and inflation in the euro area: A case for monetary indicators?,"
Journal of Monetary Economics,
Elsevier, vol. 50(8), pages 1649-1672, November.
- Gerlach, Stefan & Svensson, Lars E O, 2002. "Money and Inflation in the Euro-Area: A Case for Monetary Indicators?," CEPR Discussion Papers 3392, C.E.P.R. Discussion Papers.
- Lars E.O. Svensson & Stefan Gerlach, 2001. "Money and inflation in the Euro Area: A case for monetary indicators?," BIS Working Papers 98, Bank for International Settlements.
- Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- Neil R. Ericsson, 1998. "Empirical modeling of money demand," Empirical Economics, Springer, vol. 23(3), pages 295-315.
- Paresh Narayan & Seema Narayan & Vinod Mishra, 2009. "Estimating money demand functions for South Asian countries," Empirical Economics, Springer, vol. 36(3), pages 685-696, June.
- Abel, Andrew & Dornbusch, Rudiger & Huizinga, John & Marcus, Alan, 1979. "Money demand during hyperinflation," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 97-104, January.
- Augustine C. Arize, 2001. "Traditional export demand relation and parameter instability: An empirical investigation," Journal of Economic Studies, Emerald Group Publishing, vol. 28(6), pages 378-396, October.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Pierre L. Siklos & Andrew G. Barton, 2001. "Monetary aggregates as indicators of economic activity in Canada: empirical evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 1-17, February.
- Jalal Siddiki, 2000. "Demand for money in Bangladesh: a cointegration analysis," Applied Economics, Taylor & Francis Journals, vol. 32(15), pages 1977-1984.
- Abdelhak S Senhadji & Mohsin S. Khan, 2000.
"Threshold Effects in the Relationship Between Inflation and Growth,"
IMF Working Papers
00/110, International Monetary Fund.
- By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1.
- Ross McLeod, 2003.
"Towards improved monetary policy in Indonesia,"
Bulletin of Indonesian Economic Studies,
Taylor & Francis Journals, vol. 39(3), pages 303-324.
- Marquez, Jaime, 1987. "Money demand in open economies: A currency substitution model for Venezuela," Journal of International Money and Finance, Elsevier, vol. 6(2), pages 167-178, June.
- Laurence Ball, 1998.
"Another Look at Long-Run Money Demand,"
NBER Working Papers
6597, National Bureau of Economic Research, Inc.
- Frenkel, Jacob A, 1977. "The Forward Exchange Rate, Expectations, and the Demand for Money: The German Hyperinflation," American Economic Review, American Economic Association, vol. 67(4), pages 653-70, September.
- S. Illeris & G. Akehurst, 2001. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 21(1), pages 1-4, January.
- Abbas Valadkhani, 2005.
"Modelling Demand For Broad Money In Australia ,"
Australian Economic Papers,
Wiley Blackwell, vol. 44(1), pages 47-64, 03.
- Abbas Valadkhani, 2002. "Modelling Demand for Broad Money in Australia," School of Economics and Finance Discussion Papers and Working Papers Series 120, School of Economics and Finance, Queensland University of Technology.
- Michael Funke, 2001.
"Money Demand in Euroland,"
Quantitative Macroeconomics Working Papers
20112, Hamburg University, Department of Economics.
- Leamer, Edward E., 1985. "Vector autoregressions for causal inference?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 255-304, January.
- Cuddington, John T. & Cuddington, John T., 1983. "Currency substitution, capital mobility and money demand," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 111-133, August.
- Choudhry, Taufiq, 1995. "High inflation rates and the long-run money demand function: Evidence from cointegration tests," Journal of Macroeconomics, Elsevier, vol. 17(1), pages 77-91.
- Akhtar Hossain, 1993. "Financial Reforms, Stability of the Money Demand Function and Monetary Policy in Bangladesh: An Econometric Investigation," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 28(1), pages 85-100, January.
- Mohsin S. Khan & Pierre-Richard AgÃ©nor, 1992.
"Foreign Currency Deposits and the Demand for Money in Developing Countries,"
IMF Working Papers
92/1, International Monetary Fund.
- Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, vol. 50(1), pages 101-118, June.
- Ahmed Khalid, 1999. "Modelling money demand in open economies: the case of selected Asian countries," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1129-1135.
- 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.
- Robert L. Hetzel, 1984. "A monetarist money demand function," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 15-19.
- Bahmani-Oskooee, Mohsen, 1996. "The black market exchange rate and demand for money in Iran," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 171-176.
When requesting a correction, please mention this item's handle: RePEc:eee:asieco:v:21:y:2010:i:6:p:564-578. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.