Causal Relationship of Money Supply and Inflation: A Study of Bangladesh

Abstract

The major intendment of this study is to investigate the relation between money supply and inflation in Bangladesh using monthly data spanning from 2010.05 to 2017.12. By utilizing the cointegration and Vector Error Correction Modeling (VECM) techniques this study demonstrate that money supply does not affect the inflation in short-run and this is not true in vice-versa. In the long run, this study depicts a bi-directional causal relationship of money supply to inflation. Thus for short-run inflation in Bangladesh is not a financial incident somewhat it can boost the growth of the money supply but in the long-run inflation can significantly be influenced by the money supply. This study recommends that the monetary authority of Bangladesh can pursue the monetary policy considering the long run effect of the money supply.