Demand for Money in Bangladesh: A Cointegration Analysis

Shamim Ahmed and Md. Ezazul Islam
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Shamim Ahmed: Research Economists, Policy Analysis Unit, Research Department, Bangladesh
Md. Ezazul Islam: Research Economists, Policy Analysis Unit, Research Department, Bangladesh

Bangladesh Development Studies, 2005, vol. 31, issue 1-2, 103-120

Abstract: The demand for money, complex but essential for the formulation and conduct of efficient monetary and fiscal policy, has geared considerable research (e.g. Friedman (1959), Adekunle (1968), Fry (1978), Gupta (1983), Johansen and Juselius (1990), Hafer and Jansen (1991), and Hendry and Ericsson (1991 a, b)) since last few decades. But the determination of various factors (e.g. income, wealth, and opportunity cost of holding real balances) that affect the long-run demand for money as well as short-run dynamic adjustment of actual money balances to the desired level still remains inconclusive because of continuous monetary innovation and financial market integration. In general, in a well- functioning and matured capitalist economy, there are three motives for holding money, namely, transactions, speculative, and precautionary motives (Keynes 1936, ch. 13) and these motives depend on interest rates of alternative assets (i.e. the rate on treasury bills, bonds or securities or some weighted average rates of return on these financial assets) and the level of income, at least theoretically. In addition, empirical findings demonstrate that the demand for money adjusts to changes in income level and interest rates with a lag (Dornbusch and Fischer 2001). However, in countries with high inflation and narrow based capital market, it is also possible that the return on non-financial assets (i.e. stocks of gold, silver, real estate, and capital machinery or consumer durables) can be even higher than that on financial assets, thereby inducing households or firms to substitute/prefer non-financial assets over financial assets.

Keywords: Money demand; Deposit rates; Development studies; Long run equilibrium (search for similar items in EconPapers)
JEL-codes: A10 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (3)

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