Money, Income, and Prices in Bangladesh: A Cointegration and Causality Analysis

Md. Nisar Ahmed Shams


This paper re-examines the causal relationship between money, income and prices in Bangladesh during the period 1972/73 to 2009/10. Cointegration analysis indicates a long-run relationship among the variables. Based on the Error Correction Model (ECM), a bidirectional causality between money and income has been observed. Therefore, monetary policy should be formulated by taking into account the feedback effects of output on money. Money supply can be considered as an effective control variable as causality is found to run from money to prices supporting the Monetarists.

Key Words: Cointegration, Error Correction Model, Bivariate Causality, Trivariate Causality, Bangladesh.

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