Abstract:
This study offers a comprehensive econometric assessment of the money supply mechanism in Bangladesh, focusing on the dynamic relationships among the monetary base (H), the money multiplier (m), and the monetary aggregates (M1 and M2). The primary objective is to evaluate how effectively this process contributes to macroeconomic stability. Utilizing time series data from 2004 to 2024, various econometric techniques are employed, including tests for stationarity, Johansen cointegration, Error Correction Models (ECM), and analysis of structural breaks. The findings demonstrate a stable long-term equilibrium among the variables, with both H and m exhibiting significant positive impacts on the money supply; however, the effect of the multiplier is slightly greater. Noteworthy short-term fluctuations were observed, particularly a structural break associated with the COVID-19 pandemic, which led to substantial deviations. Diagnostic assessments revealed severe multicollinearity and autocorrelation issues, addressed through Principal Component Analysis (PCA) and Newey-West HAC standard errors to ensure reliable conclusions. The study concludes that while the Bangladesh Bank effectively manages long-term money supply, it encounters challenges with short-term variations. Policy recommendations aim to enhance the efficiency of the banking sector to stabilize the money multiplier, employing an ECM framework for dynamic policy adjustments, and tailoring policy analyses to account for post-pandemic structural changes.

Keywords:
Money Supply, Monetary Base, Money Multiplier, Cointegration, Error Correction Model, Structural Break, Bangladesh.

JEL Classifications:
E51, E52, C32, E58