Factors Affecting Money Supply in Bangladesh: An Empirical Analysis

Abstract

The study has empirically examined factors affecting Money Supply   in Bangladesh using annual time series data from 1975-6 to 2008-09. Authors observed that high-powered money played a dominant role in the money supply process of Bangladesh, thus providing partial support for the monetarist hypothesis.  However, beyond the monetarist view, additional variables in the light of the Keynesian and structuralist analysis, such as the availability of external resources and financial liberalization need to be taken into account in understanding the money supply process of the country. But some other structural variables such as government budget deficits, deposit interest rate, and bank branches were not found to be significant in explaining money supply function. However, the observed insignificance of these variables could be attributable to multicollinearity problem in the data and needed to be interpreted with caution. Since the presence of multicollinearity is not a serious problem in forecasting, it was also found that the estimated money supply models could be quite useful in forecasting money supply in Bangladesh. Moreover, the forecasting power of the estimated M1R and M2R models are also examined in this paper.