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

This paper investigates the sensitivity of money demand 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 ADF and the KPSS test 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 paper estimates the long-run demand for money relationship sequentially with a representative interest rate on treasury bills of a particular maturity by using both Ordinary Least Squares and Dynamic Ordinary Least Squares methods.