Reserve Money Transmission to Monetary Aggregates in Bangladesh: Short-Run Dynamics and Limited Persistence
Tanseer Ahamed
Department of Economics, School of Business and Economics, United International University, Dhaka, Bangladesh
Sayeda Chandra Tabassum
Department of Economics, School of Business and Economics, United International University, Dhaka, Bangladesh
DOI: https://doi.org/10.59429/ff.v4i1.15292
Keywords: reserve money; money multiplier; money supply; monetary transmission; vector autoregression; Bangladesh
Abstract
For two decades Bangladesh ran monetary policy through a reserve money programme, with broad money as the intermediate target for price stability. The programme assumed that changes in the base pass durably into the wider aggregates, yet this link has seldom been tested directly. This paper tests it, asking whether reserve money innovations reach narrow and broad money and, if so, whether the effect lasts. Monthly data for January 2003 to April 2025 (268 observations) are taken from Bangladesh Bank's Economic Trends, and observations from February 2023 onward are corrected for a unit inconsistency. The money multiplier enters only as a derived accounting ratio, because including it beside its own components would make the system singular. Unit root tests point to integration of order one and Johansen tests to cointegration, so the model is a vector autoregression in log levels with two lags and monthly seasonal dummies. Innovations are orthogonalised by a Cholesky decomposition, and confidence bands come from a moving-block bootstrap. A reserve money innovation of 3.25 per cent lifts broad money by 0.43 per cent on impact. The response is insignificant after eleven months, and most of the injection itself is reversed within a year. The derived multiplier drops by 2.83 per cent on impact in every specification tried, and in the baseline the fall loses significance after nine months. How narrow money responds depends on the identifying order. The evidence supports measurable short-run transmission alongside limited persistence, indicating that base money is a serviceable liquidity instrument but not a sufficient instrument of monetary control. The analysis identifies transmission within the money supply only, not effects on prices, output, credit or the exchange rate, and the evidence is consistent with, rather than proof of the superiority of, the move to an interest rate corridor in July 2023.
References
1. World Bank. (2024). *Bangladesh development update, April 2024: Special focus: Strengthening domestic resource mobilization*. World Bank. https://thedocs.worldbank.org/en/doc/f6dd176b982714b6e3b04d7ac672a0ab-0310012024/original/Bangladesh-Development-Update-April-2024-w-cover.pdf
2. International Monetary Fund. (2026). *Bangladesh: 2025 Article IV consultation—Press release; staff report; and statement by the executive director for Bangladesh* (IMF Country Report No. 26/24). International Monetary Fund. https://doi.org/10.5089/9798229038065.002
3. Hossain, A. A. (2010). Monetary targeting for price stability in Bangladesh: How stable is its money demand function and the linkage between money supply growth and inflation? Journal of Asian Economics, 21(6), 564–578. https://doi.org/10.1016/j.asieco.2010.07.003
4. Afrin, S. (2017). Monetary policy transmission in Bangladesh: Exploring the lending channel. Journal of Asian Economics, 49, 60–80. https://doi.org/10.1016/j.asieco.2016.10.003
5. Werner, R. A. (2016). A lost century in economics: Three theories of banking and the conclusive evidence. International Review of Financial Analysis, 46, 361–379. https://doi.org/10.1016/j.irfa.2015.08.014
6. Bachurewicz, G. R. (2019). The Post-Keynesian endogenous-money supply: Evidence from Poland. Review of Keynesian Economics, 7(3), 402–418. https://doi.org/10.4337/roke.2019.03.09
7. Grishchenko, V., Mihailov, A., & Tkachev, V. (2025). The money multiplier and competing theories of money creation: Empirical validation for Russia. Cambridge Journal of Economics, 49(2), 343–383. https://doi.org/10.1093/cje/beae036
8. Ryan, E., & Whelan, K. (2023). A model of QE, reserve demand, and the money multiplier. Journal of Money, Credit and Banking, 55(2–3), 407–439. https://doi.org/10.1111/jmcb.12975
9. World Bank. (2024). *Bangladesh development update, April 2024: Special focus: Strengthening domestic resource mobilization*. World Bank. https://thedocs.worldbank.org/en/doc/f6dd176b982714b6e3b04d7ac672a0ab-0310012024/original/Bangladesh-Development-Update-April-2024-w-cover.pdf
10. International Monetary Fund. (2026). *Bangladesh: 2025 Article IV consultation—Press release; staff report; and statement by the executive director for Bangladesh* (IMF Country Report No. 26/24). International Monetary Fund. https://doi.org/10.5089/9798229038065.002
11. Bangladesh Bank. (2023). Monetary policy statement, July–December 2023. Bangladesh Bank. https://www.bb.org.bd/en/index.php/monetaryactivity/monetarypolicy
12. International Monetary Fund. (2024). Bangladesh: Technical assistance report—Interest rate corridor adoption (IMF Technical Assistance Report No. 2024/051). International Monetary Fund. https://doi.org/10.5089/9798400278181.019
13. International Monetary Fund. (2026). *Bangladesh: 2025 Article IV consultation—Press release; staff report; and statement by the executive director for Bangladesh* (IMF Country Report No. 26/24). International Monetary Fund. https://doi.org/10.5089/9798229038065.002
14. Ahmed, S., & Islam, M. E. (2004). The monetary transmission mechanism in Bangladesh: Bank lending and exchange rate channels. The Bangladesh Development Studies, 30(3–4), 31–87. https://doi.org/10.57138/zwnp2172
15. Afrin, S. (2017). Monetary policy transmission in Bangladesh: Exploring the lending channel. Journal of Asian Economics, 49, 60–80. https://doi.org/10.1016/j.asieco.2016.10.003
16. Younus, S. (2017). Monetary transmission channels in Bangladesh: Evidence from a floating exchange rate regime. The Journal of Developing Areas, 51(2), 255–272. https://doi.org/10.1353/jda.2017.0043
17. Hossain, M., & Ibon, M. W. F. (2020). Assessing the effectiveness of monetary policy in Bangladesh. In Bangladesh's macroeconomic policy (pp. 135–162). Springer Singapore. https://doi.org/10.1007/978-981-15-1244-5_5
18. Huh, I., & Lee, Y. (2021). Monetary policy transmission mechanism of Bangladesh (ADB South Asia Working Paper Series No. 86). Asian Development Bank. https://doi.org/10.22617/WPS210540-2
19. Werner, R. A. (2016). A lost century in economics: Three theories of banking and the conclusive evidence. International Review of Financial Analysis, 46, 361–379. https://doi.org/10.1016/j.irfa.2015.08.014
20. Grishchenko, V., Mihailov, A., & Tkachev, V. (2025). The money multiplier and competing theories of money creation: Empirical validation for Russia. Cambridge Journal of Economics, 49(2), 343–383. https://doi.org/10.1093/cje/beae036
21. Ryan, E., & Whelan, K. (2023). A model of QE, reserve demand, and the money multiplier. Journal of Money, Credit and Banking, 55(2–3), 407–439. https://doi.org/10.1111/jmcb.12975
22. Dunaev, B. B. (2024). Economy regulating by using the credit multiplier. Cybernetics and Systems Analysis, 60(2), 234–247. https://doi.org/10.1007/s10559-024-00664-9
23. Younus, S. (2017). Monetary transmission channels in Bangladesh: Evidence from a floating exchange rate regime. The Journal of Developing Areas, 51(2), 255–272. https://doi.org/10.1353/jda.2017.0043
24. Afrin, S. (2017). Monetary policy transmission in Bangladesh: Exploring the lending channel. Journal of Asian Economics, 49, 60–80. https://doi.org/10.1016/j.asieco.2016.10.003
25. Hossain, M., & Ibon, M. W. F. (2020). Assessing the effectiveness of monetary policy in Bangladesh. In Bangladesh's macroeconomic policy (pp. 135–162). Springer Singapore. https://doi.org/10.1007/978-981-15-1244-5_5
26. Ahmed, S., & Islam, M. E. (2004). The monetary transmission mechanism in Bangladesh: Bank lending and exchange rate channels. The Bangladesh Development Studies, 30(3–4), 31–87. https://doi.org/10.57138/zwnp2172
27. Ofoi, M., & Sharma, P. (2021). Does the money multiplier hold in Pacific Island countries? The case of Papua New Guinea. Journal of Risk and Financial Management, 14(9), 449. https://doi.org/10.3390/jrfm14090449
28. Bachurewicz, G. R. (2019). The Post-Keynesian endogenous-money supply: Evidence from Poland. Review of Keynesian Economics, 7(3), 402–418. https://doi.org/10.4337/roke.2019.03.09
29. Khan, M. A. (2026). Is the money supply endogenous or exogenous? A panel data investigation of developing Asian countries. Journal of Central Banking Theory and Practice, 15(1), 223–249. https://doi.org/10.2478/jcbtp-2026-0010
30. Kydland, F. E., & Prescott, E. C. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy, 85(3), 473–491. https://doi.org/10.1086/260580
31. Barro, R. J., & Gordon, D. B. (1983). Rules, discretion and reputation in a model of monetary policy. Journal of Monetary Economics, 12(1), 101–121. https://doi.org/10.1016/0304-3932(83)90051-X
32. Rogoff, K. (1985). The optimal degree of commitment to an intermediate monetary target. The Quarterly Journal of Economics, 100(4), 1169–1189. https://doi.org/10.2307/1885679
33. Cukierman, A., Webb, S. B., & Neyapti, B. (1992). Measuring the independence of central banks and its effect on policy outcomes. The World Bank Economic Review, 6(3), 353–398. https://doi.org/10.1093/wber/6.3.353
34. Alesina, A., & Summers, L. H. (1993). Central bank independence and macroeconomic performance: Some comparative evidence. Journal of Money, Credit and Banking, 25(2), 151–162. https://doi.org/10.2307/2077833
35. Klomp, J., & de Haan, J. (2010). Inflation and central bank independence: A meta-regression analysis. Journal of Economic Surveys, 24(4), 593–621. https://doi.org/10.1111/j.1467-6419.2009.00597.x
36. Garriga, A. C., & Rodriguez, C. M. (2020). More effective than we thought: Central bank independence and inflation in developing countries. Economic Modelling, 85, 87–105. https://doi.org/10.1016/j.econmod.2019.05.009
37. Paul, R. C. (2025). The impact of central bank independence on inflation: Evidence from developing countries. Bank Parikrama – A Journal of Banking and Finance, 50(1), 332–357. https://doi.org/10.64204/bp1019-7044/50(1)/a20259
38. Strong, C. O. (2021). Political influence, central bank independence and inflation in Africa: A comparative analysis. European Journal of Political Economy, 69, 102004. https://doi.org/10.1016/j.ejpoleco.2021.102004
39. Gavin, M., & Manger, M. (2023). Populism and de facto central bank independence. Comparative Political Studies, 56(8), 1189–1223. https://doi.org/10.1177/00104140221139513
40. Pesme, J. (2025, December 21). Towards a stable and inclusive financial sector in Bangladesh. World Bank Blogs: End Poverty in South Asia. https://blogs.worldbank.org/en/endpovertyinsouthasia/towards-a-stable-and-inclusive-financial-sector-in-bangladesh
41. Ahmed, S., & Islam, M. E. (2004). The monetary transmission mechanism in Bangladesh: Bank lending and exchange rate channels. The Bangladesh Development Studies, 30(3–4), 31–87. https://doi.org/10.57138/zwnp2172
42. Afrin, S. (2017). Monetary policy transmission in Bangladesh: Exploring the lending channel. Journal of Asian Economics, 49, 60–80. https://doi.org/10.1016/j.asieco.2016.10.003
43. Younus, S. (2017). Monetary transmission channels in Bangladesh: Evidence from a floating exchange rate regime. The Journal of Developing Areas, 51(2), 255–272. https://doi.org/10.1353/jda.2017.0043
44. Hossain, M., & Ibon, M. W. F. (2020). Assessing the effectiveness of monetary policy in Bangladesh. In Bangladesh's macroeconomic policy (pp. 135–162). Springer Singapore. https://doi.org/10.1007/978-981-15-1244-5_5
45. Bachurewicz, G. R. (2019). The Post-Keynesian endogenous-money supply: Evidence from Poland. Review of Keynesian Economics, 7(3), 402–418. https://doi.org/10.4337/roke.2019.03.09
46. Ofoi, M., & Sharma, P. (2021). Does the money multiplier hold in Pacific Island countries? The case of Papua New Guinea. Journal of Risk and Financial Management, 14(9), 449. https://doi.org/10.3390/jrfm14090449
47. Grishchenko, V., Mihailov, A., & Tkachev, V. (2025). The money multiplier and competing theories of money creation: Empirical validation for Russia. Cambridge Journal of Economics, 49(2), 343–383. https://doi.org/10.1093/cje/beae036
48. Ryan, E., & Whelan, K. (2023). A model of QE, reserve demand, and the money multiplier. Journal of Money, Credit and Banking, 55(2–3), 407–439. https://doi.org/10.1111/jmcb.12975
49. Khan, M. A. (2026). Is the money supply endogenous or exogenous? A panel data investigation of developing Asian countries. Journal of Central Banking Theory and Practice, 15(1), 223–249. https://doi.org/10.2478/jcbtp-2026-0010
50. Garriga, A. C., & Rodriguez, C. M. (2020). More effective than we thought: Central bank independence and inflation in developing countries. Economic Modelling, 85, 87–105. https://doi.org/10.1016/j.econmod.2019.05.009
51. Strong, C. O. (2021). Political influence, central bank independence and inflation in Africa: A comparative analysis. European Journal of Political Economy, 69, 102004. https://doi.org/10.1016/j.ejpoleco.2021.102004
52. Granger, C. W. J., & Newbold, P. (1974). Spurious regressions in econometrics. Journal of Econometrics, 2(2), 111–120. https://doi.org/10.1016/0304-4076(74)90034-7
53. Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366), 427–431. https://doi.org/10.1080/01621459.1979.10482531
54. Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346. https://doi.org/10.1093/biomet/75.2.335
55. Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54(1–3), 159–178. https://doi.org/10.1016/0304-4076(92)90104-Y
56. MacKinnon, J. G. (1994). Approximate asymptotic distribution functions for unit-root and cointegration tests. Journal of Business & Economic Statistics, 12(2), 167–176. https://doi.org/10.1080/07350015.1994.10510005
57. Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2–3), 231–254. https://doi.org/10.1016/0165-1889(88)90041-3
58. MacKinnon, J. G., Haug, A. A., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14(5), 563–577. https://doi.org/10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-R
59. Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276. https://doi.org/10.2307/1913236
60. Lütkepohl, H. (2005). New introduction to multiple time series analysis. Springer. https://doi.org/10.1007/978-3-540-27752-1
61. Sims, C. A., Stock, J. H., & Watson, M. W. (1990). Inference in linear time series models with some unit roots. Econometrica, 58(1), 113–144. https://doi.org/10.2307/2938337
62. Akaike, H. (1974). A new look at the statistical model identification. IEEE Transactions on Automatic Control, 19(6), 716–723. https://doi.org/10.1109/TAC.1974.1100705
63. Schwarz, G. (1978). Estimating the dimension of a model. The Annals of Statistics, 6(2), 461–464. https://doi.org/10.1214/aos/1176344136
64. Hannan, E. J., & Quinn, B. G. (1979). The determination of the order of an autoregression. Journal of the Royal Statistical Society: Series B, 41(2), 190–195. https://doi.org/10.1111/j.2517-6161.1979.tb01072.x
65. Sims, C. A. (1980). Macroeconomics and reality. Econometrica, 48(1), 1–48. https://doi.org/10.2307/1912017
66. Hamilton, J. D. (1994). Time series analysis. Princeton University Press.
67. Enders, W. (2014). Applied econometric time series (4th ed.). Wiley.
68. Stock, J. H., & Watson, M. W. (2001). Vector autoregressions. Journal of Economic Perspectives, 15(4), 101–115. https://doi.org/10.1257/jep.15.4.101
69. Bernanke, B. S., & Mihov, I. (1998). Measuring monetary policy. The Quarterly Journal of Economics, 113(3), 869–902. https://doi.org/10.1162/003355398555775
70. Sims, C. A., & Zha, T. (1999). Error bands for impulse responses. Econometrica, 67(5), 1113–1155. https://doi.org/10.1111/1468-0262.00071
71. Brüggemann, R., Jentsch, C., & Trenkler, C. (2016). Inference in VARs with conditional heteroskedasticity of unknown form. Journal of Econometrics, 191(1), 69–85. https://doi.org/10.1016/j.jeconom.2015.10.004
72. Lütkepohl, H. (2005). New introduction to multiple time series analysis. Springer. https://doi.org/10.1007/978-3-540-27752-1
73. Jarque, C. M., & Bera, A. K. (1980). Efficient tests for normality, homoscedasticity and serial independence of regression residuals. Economics Letters, 6(3), 255–259. https://doi.org/10.1016/0165-1765(80)90024-5
74. Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987–1007. https://doi.org/10.2307/1912773
75. Chow, G. C. (1960). Tests of equality between sets of coefficients in two linear regressions. Econometrica, 28(3), 591–605. https://doi.org/10.2307/1910133
76. Ploberger, W., & Krämer, W. (1992). The CUSUM test with OLS residuals. Econometrica, 60(2), 271–285. https://doi.org/10.2307/2951597
77. MacKinnon, J. G. (1994). Approximate asymptotic distribution functions for unit-root and cointegration tests. Journal of Business & Economic Statistics, 12(2), 167–176. https://doi.org/10.1080/07350015.1994.10510005
78. MacKinnon, J. G., Haug, A. A., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14(5), 563–577. https://doi.org/10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-R
79. International Monetary Fund. (2026). *Bangladesh: 2025 Article IV consultation—Press release; staff report; and statement by the executive director for Bangladesh* (IMF Country Report No. 26/24). International Monetary Fund. https://doi.org/10.5089/9798229038065.002
80. Ploberger, W., & Krämer, W. (1992). The CUSUM test with OLS residuals. Econometrica, 60(2), 271–285. https://doi.org/10.2307/2951597
81. Jones, B., & Bowman, J. (2019). China's evolving monetary policy framework in international context (Research Discussion Paper No. 2019-11). Reserve Bank of Australia. https://www.rba.gov.au/publications/rdp/2019/2019-11/
82. Ryan, E., & Whelan, K. (2023). A model of QE, reserve demand, and the money multiplier. Journal of Money, Credit and Banking, 55(2–3), 407–439. https://doi.org/10.1111/jmcb.12975
83. Grishchenko, V., Mihailov, A., & Tkachev, V. (2025). The money multiplier and competing theories of money creation: Empirical validation for Russia. Cambridge Journal of Economics, 49(2), 343–383. https://doi.org/10.1093/cje/beae036
84. Khan, M. A. (2026). Is the money supply endogenous or exogenous? A panel data investigation of developing Asian countries. Journal of Central Banking Theory and Practice, 15(1), 223–249. https://doi.org/10.2478/jcbtp-2026-0010
85. Pesme, J. (2025, December 21). Towards a stable and inclusive financial sector in Bangladesh. World Bank Blogs: End Poverty in South Asia. https://blogs.worldbank.org/en/endpovertyinsouthasia/towards-a-stable-and-inclusive- financial-sector-in-bangladesh
86. Ofoi, M., & Sharma, P. (2021). Does the money multiplier hold in Pacific Island countries? The case of Papua New Guinea. Journal of Risk and Financial Management, 14(9), 449. https://doi.org/10.3390/jrfm14090449
87. Bachurewicz, G. R. (2019). The Post-Keynesian endogenous-money supply: Evidence from Poland. Review of Keynesian Economics, 7(3), 402–418. https://doi.org/10.4337/roke.2019.03.09
88. Grishchenko, V., Mihailov, A., & Tkachev, V. (2025). The money multiplier and competing theories of money creation: Empirical validation for Russia. Cambridge Journal of Economics, 49(2), 343–383. https://doi.org/10.1093/cje/beae036
89. Afrin, S. (2017). Monetary policy transmission in Bangladesh: Exploring the lending channel. Journal of Asian Economics, 49, 60–80. https://doi.org/10.1016/j.asieco.2016.10.003
90. Younus, S. (2017). Monetary transmission channels in Bangladesh: Evidence from a floating exchange rate regime. The Journal of Developing Areas, 51(2), 255–272. https://doi.org/10.1353/jda.2017.0043
91. Hossain, A. A. (2010). Monetary targeting for price stability in Bangladesh: How stable is its money demand function and the linkage between money supply growth and inflation? Journal of Asian Economics, 21(6), 564–578. https://doi.org/10.1016/j.asieco.2010.07.003
92. Hossain, M., & Ibon, M. W. F. (2020). Assessing the effectiveness of monetary policy in Bangladesh. In Bangladesh's macroeconomic policy (pp. 135–162). Springer Singapore. https://doi.org/10.1007/978-981-15-1244-5_5
93. World Bank. (2024). Bangladesh development update, April 2024: Special focus: Strengthening domestic resource mobilization. World Bank. https://thedocs.worldbank.org/en/doc/f6dd176b982714b6e3b04d7ac672a0ab-0310012024/original/Bangladesh-Development-Update-April-2024-w-cover.pdf
94. International Monetary Fund. (2026). Bangladesh: 2025 Article IV consultation—Press release; staff report; and statement by the executive director for Bangladesh (IMF Country Report No. 26/24). International Monetary Fund. https://doi.org/10.5089/9798229038065.002
95. Klomp, J., & de Haan, J. (2010). Inflation and central bank independence: A meta-regression analysis. Journal of Economic Surveys, 24(4), 593–621. https://doi.org/10.1111/j.1467-6419.2009.00597.x
96. Garriga, A. C., & Rodriguez, C. M. (2020). More effective than we thought: Central bank independence and inflation in developing countries. Economic Modelling, 85, 87–105. https://doi.org/10.1016/j.econmod.2019.05.009
97. Paul, R. C. (2025). The impact of central bank independence on inflation: Evidence from developing countries. Bank Parikrama – A Journal of Banking and Finance, 50(1), 332–357. https://doi.org/10.64204/bp1019-7044/50(1)/a20259
98. Strong, C. O. (2021). Political influence, central bank independence and inflation in Africa: A comparative analysis. European Journal of Political Economy, 69, 102004. https://doi.org/10.1016/j.ejpoleco.2021.102004
99. Gavin, M., & Manger, M. (2023). Populism and de facto central bank independence. Comparative Political Studies, 56(8), 1189–1223. https://doi.org/10.1177/00104140221139513
100. Dunaev, B. B. (2024). Economy regulating by using the credit multiplier. Cybernetics and Systems Analysis, 60(2), 234–247. https://doi.org/10.1007/s10559-024-00664-9
101. Bangladesh Bank. (2023). Monetary policy statement, July–December 2023. Bangladesh Bank. https://www.bb.org.bd/en/index.php/monetaryactivity/monetarypolicy
102. International Monetary Fund. (2024). Bangladesh: Technical assistance report—Interest rate corridor adoption (IMF Technical Assistance Report No. 2024/051). International Monetary Fund. https://doi.org/10.5089/9798400278181.019
103. Bernanke, B. S., & Mihov, I. (1998). Measuring monetary policy. The Quarterly Journal of Economics, 113(3), 869–902. https://doi.org/10.1162/003355398555775
104. Dunaev, B. B. (2024). Economy regulating by using the credit multiplier. Cybernetics and Systems Analysis, 60(2), 234–247. https://doi.org/10.1007/s10559-024-00664-9