Empirical Approaches to the Post-Keynesian Theory of Demand for Money: An Error Correction Model of Bangladesh

The demand for money is crucial important tool of monetary policy to deal with the macroeconomic problems and to prescribe appropriate policy of the economy. This paper investigates to empirically explore the long-run equilibrium for demand for real money balance as well as short-run dynamics in the context of monetary policy in Bangladesh. Using time-series annual data for the period 1981 to 2012 and applying the methods of cointegration and error-correction, the study find a single cointegrating equation showing long-run stable relationship between demand for money and explanatory variables in the model. The study also finds convergence of short-run dynamics towards statistically significant long-run equilibrium and concludes that the results have important implications for the conduct of monetary policy in Bangladesh.