| Summary: | Although money demand equations have been estimated for many western countries, yet only
recently many researchers have investigated the demand for money in mixed economies like
Bangladesh. Co-integration technique is now a common method of estimating any money demand
function. This paper empirically analyses the stability of the narrow and broad money demand
functions (M1, M2, and M3) in Bangladesh for the period 1999QI-2005QIIII. To determine
whether the policy framework satisfies the necessary condition for effectiveness of monetary
policy, the stability of Bangladeshi M1, M2, and M3 money demand is estimated and tested by
employing a recent co-integration procedure proposed by Johansen-Juselius (2001). It is shown that
even though M1 and M2 monetary aggregates are co-integrated with income, interest rate and
nominal effective exchange rate, application of Cumulative Sum (CUSUM) and Cumulative Sum of
Square (CUSUMSQ) tests to the residuals of an error-correction model reveal that it is unstable.
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