Causal Links between Money, Price, and Output in Bangladesh: A Cointegration and VECM Approach

Abstract

The present study is an effort to investigate the relationship among money, price and output for Bangladesh over the period 1974 to 2012. The estimated results of vector error correction model based on VAR indicate the existence of long-run bidirectional causality between money supply and output, and unidirectional causality from price level to money supply and output. However, in the short-run, the bidirectional causality is found between money supply and price level, and unidirectional causality is found from output to price level. The results suggest that money supply is responsible for increasing price level and thereby inflation is a short-run monetary experience.