JBS Vol 06. Num 1-2. 2004 - MONEY, OUTPUT AND PRICES IN BANGLADESH

This paper has examined the Granger-causal relationship between money supply growth and inflation in Bangladesh
for the period 1974-2003 within the cointegral-error correction-modeling framework. Empirical results suggest that
the consumer price index (CPI), the stock of narrow (M1) or broad money (M2) and real permanent output/income
(yp) have a cointegral relationship and that there exists a strong causal relationship running from money supply
growth to inflation. The paper draws the conclusion that the Bangladesh Bank (central bank of Bangladesh) is in a
position to conduct an independent monetary policy for price stability through a monetary or an inflation targeting
strategy. Inflation targeting as a strategy of monetary policy however remains conditional on a set of stringent
conditions and is considered not appropriate for Bangladesh at this juncture. Monetary targeting may therefore be
considered an alternative option, given that under the present market-based exchange rate system, the Bangladesh
Bank has gained an effective control over the monetary base and that there exists both a stable money demand
function and a situation of monetary stability as envisaged by monetary economists for a monetary rule.