This paper investigates the sensitivity of money demands to interest rates on treasury bills in Bangladesh, with quarterly data for the period 1997Q4-2006Q4. A standard demand for money function is specified, with real output and a representative interest rate on treasury bills, as key determinants. The Augmented Dickey-Fuller (ADF) and the Kwiatkowski, Phillips, Schmidt and Shin (KPSS) tests results suggest that real money balances (narrow or broad) and real output appear to have a unit root while, the interest rates on treasury bills are stationary. The long-run demand for money relationship is estimated sequentially, with a representative interest rate on treasury bills of a particular maturity, by both the Ordinary Least Squares (OLS) and the Dynamic Ordinary Least Squares (DOLS). Empirical results suggest that there exists a well-behaved and stable demand for money function and that the demand for money (narrow or broad) is sensitive to the interest rate, for example, on 182-day treasury bills. Finally, following Heller and Khan (1979), this paper incorporates the term-structure of interest rates in the money demand function.
The ICFAI University Journal of Monetary Economics Vol. 7, Issue 1, p. 78-98