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Interest Rates and the Demand for Money in Bangladesh: An Empirical Investigation with Quarterly Data, 1997Q4-2006Q4

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  • Akhand Akhtar Hossain
  • Sayera Younus

Abstract

This paper investigates the sensitivity of money demands to interest rates on treasury bills in Bangladesh, with quarterly data for the period 1997Q4-2006Q4. A standard demand for money function is specified, with real output and a representative interest rate on treasury bills, as key determinants. The Augmented Dickey-Fuller (ADF) and the Kwiatkowski, Phillips, Schmidt and Shin (KPSS) tests results suggest that real money balances (narrow or broad) and real output appear to have a unit root while, the interest rates on treasury bills are stationary. The long-run demand for money relationship is estimated sequentially, with a representative interest rate on treasury bills of a particular maturity, by both the Ordinary Least Squares (OLS) and the Dynamic Ordinary Least Squares (DOLS). Empirical results suggest that there exists a well-behaved and stable demand for money function and that the demand for money (narrow or broad) is sensitive to the interest rate, for example, on 182-day treasury bills. Finally, following Heller and Khan (1979), this paper incorporates the term-structure of interest rates in the money demand function.

Suggested Citation

  • Akhand Akhtar Hossain & Sayera Younus, 2009. "Interest Rates and the Demand for Money in Bangladesh: An Empirical Investigation with Quarterly Data, 1997Q4-2006Q4," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(1), pages 78-98, February.
    • Handle: RePEc:icf:icfjmo:v:07:y:2009:i:1:p:78-98
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    Cited by:

    1. Barnett, William A. & Ghosh, Taniya & Adil, Masudul Hasan, 2022. "Is money demand really unstable? Evidence from Divisia monetary aggregates," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 606-622.

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