Financial Development and Velocity of Money in Bangladesh: A Vector Auto- Regression Analysis

The study uses co-integration and vector auto-regression (VAR) techniques to identify the determinants of income velocity of money (VM) in Bangladesh, covering both narrow and broad money. The study observes that financial development affects VM negatively. The VAR estimates show that two variables, real GDP growth and financial development, jointly account for around half of the variance of speed of VM for both M1 and M2. The results show that it is important for the monetary authorities to take into account both stages of economic and financial development in forecasting VM for designing effective monetary policy in Bangladesh.[PAU WP no.0806]