EXCHANGE RATE UNCERTAINTY AND THE DEMAND FOR MONEY IN BANGLADESH: AN ANALYSIS OF VECM MODEL

Abstract

This paper examines the effect of the exchange rate and its volatility on the demand for money in Bangladesh along with other relevant variables based on monthly data from January 1999 to June 2018. This study applies the Phillips-Perron test to check the stationarity of the variables, Johansen tests for cointegration analysis, and Vector error-correction approach for short and long estimation. The results indicate that income and interest rates positively affect the demand for money in the long run, while exchange rate and volatility in the exchange rate have a negative and significant impact on money demand function in the long run. On the other hand, the variables such as income, exchange rate, and volatility in the exchange rate, have a positive and insignificant relationship with money demand function in the short run, while the interest rate is negative and insignificant associated with money demand function in the short run.