Components of the Money Supply Process in Bangladesh: An Analysis

Author:Sabiha Akter

Abstract:
This study provides a comprehensive assessment of the components and effectiveness of the money supply process in Bangladesh, with a particular focus on its underlying determinants, trends, and policy implications. The primary objective is to evaluate whether the existing money supply mechanism, as implemented by the Bangladesh Bank, is effective in meeting the country’s macroeconomic objectives of price stability, economic growth, and financial stability. The research adopts a mixed-method approach, integrating both descriptive and econometric analyses. Descriptive statistics and trend analysis are used to examine the historical patterns of monetary aggregates namely the monetary base (H), money multiplier (m), narrow money (M1), and broad money (M2) over the past two decades. The results reveal that the money supply process in Bangladesh exhibits both short-run volatility and long-run stability, with the monetary base and money multiplier jointly influencing the expansion of M2. Co-integration tests confirm the existence of long-term equilibrium relationships among monetary aggregates, while ECM results suggest a moderate speed of adjustment toward equilibrium following shocks. However, structural break analysis indicates that global financial crises, domestic policy shifts, and recent pandemic-related disruptions have caused significant short-term deviations. The findings highlight that although the Bangladesh Bank’s monetary policy framework has been largely effective in steering the long-run trajectory of the money supply, challenges remain in managing short-run fluctuations and in aligning monetary expansion with real economic growth. The study concludes with policy recommendations aimed at enhancing the effectiveness of the money supply process, including improving forecasting models, strengthening monetary transmission mechanisms, and enhancing coordination between monetary and fiscal policy.

Keywords:Money Supply, Monetary Base, Money Multiplier, Monetary Policy, Bangladesh, Co-integration, Error Correction Model, Vector Error Correction Model.

DOI:10.46333/ijtc/14/2/5

International Journal of Trade & Commerce (Vol: 14 Issue:2)