Financial Reforms, Stability of the Money Demand Function and Monetary Policy in Bangladesh : An Econometric Investigation

This paper estimates a quarterly short run money demand model for Bangladesh for the 1976q4-89q1 period and tests for its stability. Real income, interest rate and the expected rate of inflation are found to be the major determinants of money demand in Bangladesh. Both the Chow and CUSUM and CUSUMSQ tests of stability suggest that although the broad money demand function remained largely stable during most of the 1980s, the narrow money demand function exhibited instability during the 1982-87 period. The instability in the money demand function might have been caused by financial reforms in Bangladesh since the early 1980s.