Bangladesh Bank Training Academy Journal

Abstract

The major objective of this paper is to examine the dynamic and causal linkages between Reserve Money (RM) with Net Foreign Asset (NFA) of Bangladesh Bank (BB) and Government Net Borrowing (GNB) from Bangladesh Bank over the period of 1975 to 2014. Though NFA is merely a part of RM but in reality it has an exogenous or autonomous nature. Therefore, we applied unit root tests, Johansen co-integration test, error-correction models and Granger causality test by taking care of the stochastic properties of the relevant variables. Both short run and long run relationships of RM with GNB and NFA of BB have been confi rmed, i.e., RM is caused by GNB and infl ows of foreign currencies. Thus BB’s money supply depends on growth in as well as growth of NFA. The autonomous nature of NFA is weakening BB’s scope to curb money supply. The paper attempts to fi ll in the existing gap in literature regarding monetary policy implementation process in Bangladesh.