Empirical Analysis of the Relationship between Money Supply and Per Capita GDP Growth Rate in Bangladesh

Abstract

This study seeks to assess the impact of relationship between Money Supply and Per Capita GDP Growth Rate in Bangladesh over the period 1972-2014 with a VECM model. The model is specified with three variables, namely, the percentage of Broad Money to GDP (BMGDP), the Real Interest Rate (RIR) and the Annual Per Capital GDP Growth Rate (GRGDP). Findings suggest that steady BMGDP is associated with GRGDP and money supply has important impact on the growth rate of output in the long run. The government should maintain consistency and follow “the Taylor rule” to allow money supply to increase at a steady rate keeping pace with the economic growth. Respect to such a rule will help the central bank to avoid the inefficiencies that result from execution of discretionary policy. It also helps to resist the political pressure very much prevalent in Bangladesh and often behind such discretionary policies. Keywords: