The Long-Run Dynamic Relationship between Broad Money Supply and the GDP of Bangladesh: A VECM Approach

Abstract

After commencing the cash economy money appeared as an engine of economic growth. The endeavor has given in this study to uncover out the underlying relationship between broad money supply (M₂) and GDP of Bangladesh and ascertain the influence of M₂ on GDP in selected study period. The Johansen Cointegretion test signifies that broad money supply and GDP are close-fitting and moving together in the long run. After fitting the Vector Error Correction Model it is discerned that there is an establishment of long run association between M₂ supply and GDP. The parameters of this model demonstrate that causality is running from broad money supply to GDP, meaning that M₂ manipulates the GDP enduringly. It is originated in the post estimation specification tests that there is no auto-correlation at lag order and residuals are normally distributed.

Keywords: Money Supply, GDP, VECM, Forecasting, Impulse Response Function