Group 06 Section C ME Term Paper

Determinants of Money
Supply in Bangladesh
(1971-72 to 2019-20)
Determinants of Money Supply
in Bangladesh (1971-72 to 2019-20)
Submitted for:
DR. Muhammad Saifuddin Khan
Associate Professor
Department of Finance
University of Dhaka
Submitted by:
Group: 06
Section: C
University of Dhaka
ID Name
24-043 Md. Jahangir
24-046 Mustafizur Rahman
24-059 Suhala Tahsin
24-063 Ifrat Khan
24-143 Rifa Rafia
Date of Submission: 30th May, 2021

Letter of Transmittal
30th May, 2021
DR. Muhammad Saifuddin Khan

Associate Professor
Faculty of Business Studies
University of Dhaka
Subject: Submission of Term Paper on “Determinant’s of Money Supply in Bangladesh”
Dear Sir,
With due respect and humble submission, I want to inform you that this term paper is prepared
according to your valuable instruction. We have given our level best effort to collected data from
1971-72 to 2019-20 of different economic variables which play vital role in money supply of
Bangladesh & perform all the calculation by using our knowledge of Monetary Economics that
you taught in the classes.
We hope that our endeavor will serve the purpose. We sincerely believe that the knowledge and
experience we have gathered during making the report will immensely help us in our future
personal career.
We thank you for providing us with this opportunity & hope that you’ll consider all our faults
generously.
Sincerely Yours,
________________________
Group: 06
Section: C, BBA 24th Batch
University of Dhaka
Contents
Chapter 1: Introduction ............................................................................................................................. 4

Chapter 2: Literature Review .................................................................................................................... 5
Chapter 3: Data and Methodology ............................................................................................................ 6
Table-1: Money Supply & It’s Components ......................................................................................7
Table-2: Broad Money Supply & It’s Sources ...................................................................................9
Table-3: Monetary Base & It’s Components .................................................................................. 12
Table-4 Monetary Base & It’s Sources ........................................................................................... 14
Table-5: Money Multiplier & It’s Components ............................................................................... 16
Table-6: Money Multiplier & It’s Sources ...................................................................................... 19
Table-7: Narrow Money M1 to Broad Money M2 Ratio ................................................................. 22
Table-8: Broad Money Supply to GDP Ratio................................................................................... 23
Table-9: Bangladesh Income Velocity of Inflation, GDP Growth & M2 Growth Rate ........................ 24
Table-10: Regression Model for Narrow Money Supply M1 ........................................................... 26
Table-10.1: Regression Output for Narrow Money Supply M1 ....................................................... 27
Table-11: Regression Model for Broad Money Supply M2 .............................................................. 28
Table-11.1: Regression Output for Broad Money Supply M2 .......................................................... 30
Table-12: Total Credit to Government (Gross) by Banking System .................................................. 31
Chapter 4: Empirical Analysis................................................................................................................. 33
Money Supply ......................................................................................................................................... 33
Components of Money Supply............................................................................................................ 34
Behavior of Money Supply & It’s Determinant ................................................................................... 35
Sources of Money Supply.................................................................................................................... 36
Determinants of Money Supply ............................................................................................................... 38
Monetary Base ....................................................................................................................................... 38
Component of Monetary Base ............................................................................................................ 38
Sources of Monetary Base .................................................................................................................. 40
The Money Multiplier ............................................................................................................................ 41
Deriving the Money Multiplier............................................................................................................ 42
Factors Affecting the Money Multiplier .............................................................................................. 43
Sources of Money Multiplier .............................................................................................................. 48
Other Factors Affecting the Money Multiplier ................................................................................... 50
Summary ............................................................................................................................................. 56
The Ratios ............................................................................................................................................... 57
Summary ............................................................................................................................................. 61
Regression Analysis ................................................................................................................................ 62
Money Supply (M1R) .......................................................................................................................... 63
Money Supply (M2R) .......................................................................................................................... 64
Summary of M1R & M2R .................................................................................................................... 66
Chapter 05: Conclusion ............................................................................................................................ 67
Findings ............................................................................................................................................... 67
Recommendation................................................................................................................................ 68
Conclusion ........................................................................................................................................... 69
References .......................................................................................................................................... 70
Chapter 1: Introduction
The control of money supply is an important policy tool in conducting monetary policy. The
success of monetary policy depends on the degree of predictability, measurability and
controllability that the monetary authority has over money supply. This paper analyses the
different statistical economic data relating to money supply. To get the outcome of the study
determinants of money supply, monetary base and money multiplier have been explained.
In the model of money supply the Central Bank, DMBs and depositors directly influence the
money supply. The variables are grouped by the player(s) who is the primary influence behind the
variable. The central bank influences the money supply by controlling monetary base, reserves and
required reserve ratio. The monetary base or reserve money (also called high-powered money) is
being used as an operating target in the line with overall money projection, which is a part of
accommodative monetary policy and liquidity management. The reserve money equals currency
in circulation plus total reserve in the banking system.
There have been significant changes in the legal, institutional and policy frameworks of the
financial system of Bangladesh under the Financial Sector Reform Programs (FSRP) in the 1990s.
These changes enable Bangladesh Bank to conduct monetary policy on the basis of market-based
instruments along with direct instruments in order to achieve price stability and smooth financial
intermediation. Therefore, understanding the distinct active channels of monetary transmission in
the economy of Bangladesh would guide the monetary authority in formulating and conducting
monetary policy.
The study had empirically tested the money supply function for Bangladesh using annual time
series data. We have observed that high-powered money played a very significant role in the
money supply process of Bangladesh, particularly with respect to the narrow money supply M1,
thus providing some support for the monetarist model. And other variables include GDP, Inflation,
Foreign Resources, TNBB, Reserve, NDA etc.
Our objective of the analysis was to determine the factors which explain the variations in the supply
of money, evaluate the sources and components of Money supply and Monetary base, the trend &
behavior of Broad money, control mechanism of Bangladesh Bank over the components of Broad
Money, Monetary Base & Money Multiplier, to find out the impact of Money supply on overall
Economy of Bangladesh.
The outcome of our analysis is that the factors of the determinants have a great impact on money
supply as well as on the growth of M2. The ratios C/D, R/D and E/D changed mm as well as MB
result reflected on money supply.
4
Chapter 2: Literature Review
In Economics, several alternative indicators such as M1 or M2 money are used as measures money
supply in a country. M1 is the narrow money supply, which includes currency outside banks plus
demand deposit, and the broad money M2 includes currency outside banks plus demand deposit
plus saving deposit. Both M1 and M2 money can be significantly influences by the amount of
High-Powered money, which is also known as the monetary base. This High powered money
consists of currency in circulation and the bank reserves and serves as the base, based on which
both M1 and M2 is determined through a money multiplier process.
Monetary Base, GDP, Foreign Resources, Inflation etc. are considered as proximate determinants
of the money supply. Principal determinants of the money supply are also causative factors of
demand for money. As such simultaneous effect of supply of and demand for money creates
equilibrium position in the monetary sector in Bangladesh.
The components of the Monetary Base include currency in circulation, currency held in banks,
deposits of DMBs and other deposits by NBFI which creates the monetary base for money supply.
The major two sources of Monetary Base are, Net Foreign Asset (NFA) & Net Domestic Asset
(NDA).
To understand how the money supply process works, we have derived results using a concept
called the money multiplier. It is affected by three factors: The currency-deposit ratio (C/D), The
excess reserves-deposit ratio (E/D), The required reserves ratio (R/D).
We have also conducted an analysis on Movement of GDP Growth rate to M1 and M2 Growth
rate. And Bangladesh Income Velocity of Inflation, with GDP Growth & M2 Growth Rate. And
finally run a Regression Model for Broad Money Supply M1, and a Regression Model for Broad
Money Supply M2.
5
Chapter 3: Data and Methodology
Bangladesh became independent on 16th December of 1971. After independence her economy had
suffered due to legacy of the war. Immediately after independence, for this term paper, we have
considered first three years as transitional, hence abnormal periods. Though we wanted to study
from the date of birth of Bangladesh in all of our findings but in some particular cases some
variable data was not available for starting 10/15 years of independence. Although macro-
economic stability programs and structural adjustment processes started in the middle of 1980’s,
but due to various repression prevailing in the economy, financial liberalization started in earnest
in the 1990’s.
To make the study more up-to-date, we have taken the latest available data for which the study
period is extended up to 2020. As such study period is 1971-72 to 2019-20 totaling 49th years.
Time period of the study can be divided into two sub-periods as mentioned below: a) Sub period-
1: Monetary Policy under administrative control i.e., 1971-72 to 1994-95. 7 b) Sub period-2:
Monetary Policy under reform measures i.e., 1995-96 to 2019-20.
We have also created a Money Supply model & run regression for it. We have used two alternative
definitions of the money supply i.e. narrow money (M1) and Broad money (M2) where money
supply is considered as the independent variable in relevant equations and other variables like
Monetary Base, GDP, Foreign Resources etc. considered as dependent variables.
The study is made based on the analysis of secondary data obtained from the Bangladesh Bank,
Ministry of Finance, Bangladesh Bureau of Statistics (BBS) and the paper on National Strategy
for Accelerated Poverty Alleviation (NSAPR). During the analysis, publications of Bangladesh
Bank, its different issues of Monetary Policy Statements (MPS), Monetary Policy Reviews (MPR),
Monthly Economic Trend (up-to December, 2020), Annual Reports, Scheduled Bank Statistics,
Bangladesh Bank Bulletin, Bangladesh Bank Quarterly, Balance of Payments, Bangladesh Bank
website (www.bangladeshbank.org.bd), Circulars, Working Papers, Policy Notes, Policy Papers
were consulted. Also, different issues of Bangladesh Economic Review 2 published by Ministry
of Finance, Statistical Yearbook, Journals and Periodicals were very helpful to the study.
Furthermore, discussion with the relevant officials of Bangladesh Bank has been applied for
empirical experience. Also, relevant statistical test, spreadsheet analysis has been made to find out
the outcome. Tables as well as graphical presentation of the relevant data were used to show its
trends and outcomes in this study. Basically, this study was confined to the behavior and trend
analysis among the components of money supply. Exact sources of data are mentioned where
required.
6
Table-1: Money Supply & It’s Components
(Taka in Crores)
Currency in Circulation Deposits
Money
End of Currency in Currency Supply M2
Currency Demand Total Deposit (3+6)
Period Tills of Outside Time Deposit
Issued Deposit (4+5)
DMBs Banks(1-2)
1 2 3 4 5 6 7
1971-72 211.21 35.61 175.60 217.18 306.43 523.61 699.21
1972-73 305.39 18.96 286.43 290.60 412.08 702.68 989.11
1973-74 352.20 21.10 331.10 414.00 499.20 913.20 1,244.50
1974-75 316.80 26.60 290.20 508.90 460.40 969.30 1,259.60
1975-76 364.20 34.30 329.90 552.20 514.70 1,066.90 1,396.90
1976-77 421.80 65.50 356.30 616.40 767.00 1,383.40 1,739.90
1977-78 570.70 66.40 504.30 719.50 916.90 1,636.40 2,141.10
1978-79 693.30 80.00 613.30 911.40 1,235.20 2,146.60 2,760.00
1979-80 796.60 103.20 693.40 1,038.20 1,513.20 2,551.40 3,245.00
1980-81 1,005.00 126.20 878.80 1,071.30 2,149.70 3,221.00 4,100.00
1981-82 1,013.10 135.60 877.50 1,134.50 2,536.60 3,671.10 4,548.70
1982-83 1,285.10 146.50 1,138.60 1,495.00 3,263.90 4,758.90 5,898.20
1983-84 1,791.80 235.50 1,556.30 1,993.40 4,835.90 6,829.30 8,385.80
1984-85 1,998.60 275.70 1,722.90 2,508.70 6,302.40 8,811.10 10,534.20
1985-86 2,291.50 338.40 1,953.10 2,974.30 7,410.20 10,384.50 12,338.10
1986-87 2,436.90 362.00 2,074.90 3,186.30 9,090.30 12,276.60 14,353.10
7
1987-88 2,817.30 402.30 2,415.00 2,632.70 11,360.30 13,993.00 16,408.00
1988-89 3,048.10 432.50 2,615.60 2,845.10 13,617.40 16,462.50 19,078.10
1989-90 3,694.30 506.00 3,188.30 3,180.40 15,928.90 19,109.30 22,297.60
1990-91 4,235.70 623.90 3,611.80 3,591.90 17,800.70 21,392.60 25,004.40
1991-92 4,671.30 598.70 4,072.60 4,184.60 20,268.70 24,453.30 28,525.90
1992-93 5,019.00 538.90 4,480.10 4,582.50 22,473.00 27,055.50 31,535.60
1993-94 6,107.50 691.50 5,416.00 5,751.10 25,235.90 30,987.00 36,403.00
1994-95 7,188.50 623.40 6,565.10 6,614.30 29,032.90 35,647.20 42,212.30
1995-96 7,899.30 776.00 7,123.30 7,336.10 31,231.10 38,567.20 45,690.50
1996-97 8,454.70 880.10 7,574.60 7,592.40 35,460.30 43,052.70 50,627.30
1997-98 9,076.6 923.3 8,153.3 7,735.2 39,980.5 47,715.7 55,869.0
1998-99 9,713.5 1,026.9 8,686.6 8,562.8 45,777.3 54,340.1 63,026.7
1999-00 11,264.4 1,088.4 10,176.0 9,705.3 54,881.1 64,586.4 74,762.4
2000-01 12,832.8 1,354.5 11,478.3 10,869.1 64826.8 75,695.9 87,174.1
2001-02 13,880.2 1,348.8 12,531.4 11,620.4 74,454.9 86,075.3 98,616.0
2002-03 15,342.3 1,440.5 13,901.6 12,827.9 87,251.1 100,079.0 113,994.3
2003-04 17,287.4 1,476.4 15,811.0 14,612.6 99,273.7 113,886.3 129,721.7
2004-05 20,327.9 1,809.8 18,518.1 16,849.9 116,042.3 132,892.2 151,446.4
2005-06 24,894.1 2,032.0 22,862.1 19,739.6 138,021.9 157,761.5 180,674.2
2006-07 28,787.4 2,143.6 26,643.8 23,462.5 161,336.2 184,798.7 211,504.2
2007-08 35,648.5 2,958.6 32,689.9 26,517.6 189,480.5 215,998.1 248,794.9
2008-09 39,448.7 3,399.5 36,049.2 30,236.5 230,073.0 260,309.5 296,499.9
2009-10 50,465.4 4,308.3 46,157.1 41,621.8 275,042.8 316,664.6 363,031.1
2010-11 60,526.9 5,731.8 54,795.1 48,106.2 337,418.9 385,525.1 440,520.0
2011-12 64,896.5 6,479.4 58,417.1 51,060.4 407,388.1 458,448.5 517,109.5
2012-13 75,372.3 7,819.4 67,552.9 55,736.5 479,902.3 535,638.8 603,505.4
8
2013-14 85,485.2 8,576.8 76,908.4 64,344.3 558,978.4 623,322.7 700,623.5
2014-15 98,153.9 10,213.1 87,940.8 72,383.8 626,799.9 699,183.7 787,613.7
2015-16 132,305.2 10,230.7 122,074.5 89,759.1 703,947.2 793,706.3 916,377.9
2016-17 151,265.2 13,733.4 137,531.8 101,885.2 775,997.6 877,882.8 1,016,076.1
2017-18 154,940.5 14,023.0 140,917.5 113,217.1 855,087.3 968,304.4 1,109,981.0
2018-19 170,387.1 16,100.1 154,287.0 118,217.9 946,318.1 1,064,536.0 1,219,611.5
2019-20 208,094.1 15,979.6 192,114.5 135,528.4 1,045,471.1 1,180,999.5 1,373,735.0
Source: Bangladesh Bank, Statistical Department
Table-2: Broad Money Supply & It’s Sources

(Tk. In crores)
Net Foreign
Domestic Credit
Assets
Public Sector
Government Other Public Net Broad
Net
End (Net) Sector Domestic Money
Other
of Assets (M2)
Private Assets
Period BB DMBs (7+8) (1+2+9))
Sector
BB DMBs BB DMBs
1 2 3 4 5 6 7 8 9 10
1973-74 (40) 102 403 239 31 346 320 (157) 1,182 1,245
1974-75 105 74 460 167 32 556 289 (423) 1,081 1,260
1975-76 (89) 74 580 142 31 659 346 (345) 1,412 1,397
1976-77 62 50 473 259 31 706 516 (356) 1,627 1,740
1977-78 (46) 75 589 235 36 890 723 (361) 2,112 2,141
1978-79 79 137 541 316 91 1,145 926 (474) 2,544 2,760
1979-80 (201) 160 759 283 182 1,330 1,396 (664) 3,286 3,245
1980-81 (625) 264 1,297 366 243 1,605 1,763 (776) 4,497 4,136
9
1981-82 (1,383) 253 1,289 373 310 2,126 2,365 (784) 5,679 4,549
1982-83 (819) 362 1,047 560 366 2,097 3,098 (811) 6,356 5,899
1983-84 (444) 362 1,014 1,055 530 2,023 4,915 (1,068) 8,468 8,386
1984-85 (590) 350 1,072 916 677 2,552 6,891 (1,334) 10,774 10,534
1985-86 (633) 492 1,108 745 871 3,102 8,356 (1,703) 12,479 12,338
1986-87 (365) 542 1,064 915 881 3,475 8,974 (1,131) 14,177 14,353
1987-88 318 282 1,236 482 932 3,428 10,896 (1,165) 15,808 16,408
1988-89 456 321 986 284 934 3,700 13,360 (963) 18,301 19,078
1989-90 (265) 692 1,678 336 928 4,084 16,005 (1,161) 21,870 22,298
1990-91 1,137 615 1,678 510 933 4,425 17,823 (2,116) 23,253 25,004
1991-92 3,387 638 1,197 2,429 903 4,741 17,939 (2,707) 24,501 28,526
1992-93 5,663 418 1,448 2,474 883 5,152 19,317 (3,819) 25,455 31,536
1993-94 8,159 902 1,010 2,799 1,636 3,983 20,973 (3,058) 27,342 36,403
1994-95 8,772 1,600 1,254 3,255 1,057 4,739 30,023 (8,488) 31,840 42,212
1995-96 5,297 1,347 3,037 3,273 1,196 4,494 34,870 (7,822) 39,046 45,691
1996-97 4,920 1,533 4,489 3,528 1,193 4,929 38,948 (8,912) 44,175 50,628
1997-98 5,305 1,397 5,296 3,977 1,405 5,087 44,206 (10,803) 49,167 55,869
1998-99 4,617 1,693 6,360 4,904 1,366 4,944 51,125 (11,982) 56,717 63,027
1999-00 5,666 2,603 8,098 6,692 1,321 5,188 56,521 (11,325) 66,494 74,762
2000-01 4,812 2,341 10,107 7586.5 1,305 6,389 65,659 (11,026) 80,021 87,174
2001-02 7,230 2,004 12,834 7,428 1,278 6,303 74,554 (13,015) 89,382 98,616
2002-03 11,810 1,782 7,353 11,675 1,282 6,312 84,028 (10,246) 100,403 113,995
2003-04 13,542 2,371 11,848 10,051 1,241 7,777 95,869 (12,978) 113,808 129,721
2004-05 14,678 3,540 15,674 9,908 1,106 10,134 112,016 (15,609) 133,228 151,446
2005-06 18,640 2,871 24,983 6,552 1,016 13,545 132,318 (19,249) 159,163 180,674
10
2006-07 28,758 3,623 25,075 10,864 988 15,058 152,177 (25,038) 179,123 211,504
2007-08 32,814 4,482 25,928 20,823 946 9,216 190,136 (35,550) 211,499 248,795
2008-09 43,228 4,215 28,472 29,536 853 10,067 217,928 (37,797) 249,058 296,500
2009-10 61,181 5,869 21,471 32,782 831 11,983 270,761 (41,846) 295,982 363,031
2010-11 61,342 9,231 31,711 41,517 777 16,176 340,713 (60,946) 369,947 440,520
2011-12 68,930 9,889 37,855 53,874 1,182 14,160 407,902 (76,682) 438,291 517,110
2012-13 103,246 10,139 27,069 83,056 1,355 8,101 452,157 (81,616) 490,121 603,505
2013-14 147,497 12,560 3,841 113,689 1,203 11,534 507,640 (97,339) 540,567 700,624
2014-15 177,394 11,828 811 109,447 2,161 14,509 574,599 (103,134) 598,393 787,614
2015-16 218,904 14,232 13,374 100,846 2,016 14,036 671,009 (118,038) 683,242 916,378
2016-17 252,027 14,670 12,978 84,356 2,158 15,122 776,057 (141,291) 749,379 1,016,076
2017-18 253,510 11,165 22,572 72,323 2,368 16,832 907,532 (176,320) 845,307 1,109,981
2018-19 257,195 15,204 31,189 82,084 2,380 20,975 1,010,256 (199,673) 947,212 1,219,612
2019-20 286,041 11,295 42,117 139,034 2,552 26,663 1,097,268 (231,235) 1,076,399 1,373,735
11
Table-3: Monetary Base & It’s Components
(Taka in Crores)
Currency in Circulation Deposits with BB
Currency Currency in Total By DMBs By NBFIs Total Monetary

End of Outside Tills of Currency Deposit Base (3+6)
Period Banks DMBs (1+2) (4+5)
In Taka In Taka
A/C A/C
1 2 3 4 5 6 7
1971-
72 175.60 35.61 211.21 103.22 0.20 103.42 314.63
1972-
73 286.43 18.96 305.39 65.84 0.30 66.14 371.53
1973-
74 331.10 21.10 352.20 85.60 0.20 85.80 438.00
1974-
75 290.20 26.60 316.80 91.80 0.10 91.90 408.70
1975-
76 329.90 34.30 364.20 98.20 0.10 98.30 462.50
1976-
77 356.30 65.50 421.80 106.00 0.20 106.20 528.00
1977-
78 504.30 66.40 570.70 108.60 0.40 109.00 679.70
1978-
79 613.30 80.00 693.30 153.70 0.10 153.80 847.10
1979-
80 693.40 103.20 796.60 249.30 0.20 249.50 1,046.10
1980-
81 878.80 126.20 1,005.00 264.30 0.20 264.50 1,269.50
1981-
82 877.50 135.60 1,013.10 253.60 0.10 253.70 1,266.80
1982-
83 1,138.60 146.50 1,285.10 257.90 0.70 258.60 1,543.70
1983-
84 1,556.30 235.50 1,791.80 406.00 0.20 406.20 2,198.00
1984-
85 1,722.90 275.70 1,998.60 613.30 0.20 613.50 2,612.10
1985-
86 1,953.10 338.40 2,291.50 675.80 0.50 676.30 2,967.80
12
1986-
87 2,074.90 362.00 2,436.90 968.20 1.60 969.80 3,406.70
1987-
88 2,415.00 402.30 2,817.30 1,881.50 - 1,881.50 4,698.80
1988-
89 2,615.60 432.50 3,048.10 2,066.90 - 2,066.90 5,115.00
1989-
90 3,188.30 506.00 3,694.30 2,229.50 - 2,229.50 5,923.80
1990-
91 3,611.80 623.90 4,235.70 2,124.00 - 2,124.00 6,500.70
1991-
92 4,072.60 598.70 4,671.30 1,887.00 - 1,887.00 6,822.10
1992-
93 4,480.10 538.90 5,019.00 3,539.60 - 3,539.60 8,944.80
1993-
94 5,416.00 691.50 6,107.50 4,769.40 - 4,769.40 11,307.90
1994-
95 6,565.10 623.40 7,188.50 2,687.60 - 2,687.60 10,630.00
1995-
96 7,123.30 776.00 7,899.30 2,273.60 - 2,273.60 11,003.00
1996-
97 7,574.60 880.10 8,454.70 3,017.80 - 3,017.80 12,394.50
1997-
98 8,153.30 923.30 9,076.60 3,655.90 - 3,655.90 13,617.60
1998-
99 8,686.60 1,026.90 9,713.50 3,812.50 - 3,812.50 14,742.70
1999-
00 10,176.00 1,088.40 11,264.40 4,183.40 - 4,183.40 17,064.10
2000-
01 11,478.30 1,354.50 12,832.80 3,385.70 - 3,385.70 18,927.40
2001-
02 12,531.40 1,348.80 13,880.20 6,683.50 9.30 6,692.80 20,573.00
2002-
03 13,901.80 1,440.50 15,342.30 6,085.50 13.70 6,099.20 21,441.50
2003-
04 15,811.00 1,476.40 17,287.40 6,558.60 24.40 6,583.00 23,870.40
2004-
05 18,518.10 1,809.80 20,327.90 7,036.40 36.10 7,072.50 27,400.40
2005-
06 22,862.10 2,032.00 24,894.10 9,010.00 50.60 9,060.60 33,954.70
2006-
07 26,643.80 2,143.60 28,787.40 10,573.60 61.70 10,635.30 39,422.70
2007-
08 32,689.90 2,958.60 35,648.50 11,806.70 106.90 11,913.60 47,562.10
13
2008-
09 36,049.20 3,399.50 39,448.70 23,159.50 141.20 23,300.70 62,749.40
2009-
10 46,157.10 4,308.30 50,465.40 23,468.00 209.40 23,677.40 74,142.80
2010-
11 54,795.10 5,731.80 60,526.90 29,007.70 199.80 29,207.50 89,734.40
2011-
12 58,417.10 6,479.40 64,896.50 32,662.30 243.90 32,906.20 97,802.70
2012-
13 67,552.90 7,819.40 75,372.30 36,803.40 313.70 37,117.10 112,489.40
2013-
14 76,908.40 8,576.80 85,485.20 43,997.70 392.40 44,390.10 129,875.30
2014-
15 87,940.80 10,213.10 98,153.90 49,838.90 489.20 50,328.10 148,482.00
2015-
16 122,074.50 10,230.70 132,305.20 60,299.00 597.10 60,896.10 193,201.30
2016-
17 137,531.80 13,733.40 151,265.20 72,732.70 661.50 73,394.20 224,659.40
2017-
18 140,917.50 14,023.00 154,940.50 78,043.40 759.10 78,802.50 233,743.00
2018-
19 154,287.00 16,100.10 170,387.10 75,012.10 788.50 75,800.60 246,187.70
2019-
20 192,114.50 15,979.60 208,094.10 75,768.30 621.00 76,389.30 284,483.40
Table-4 Monetary Base & It’s Sources

(Taka in Crores)
Domestic Credit
Net
Net Net
End of Domestic
Foreign Other Deposit Other Monetary
the Private Total Assets
Asset Government Public Money Assets Base (1+8)
Period Sector (2+3+4+5) (6+7)
(Net) Sector Banks
1 2 3 4 5 6 7 8 9
1990-91 1,137 1,678 933 - 3,939 6,549 (1,186) 5,364 6,501
1991-92 3,387 1,197 903 - 3,373 5,473 (2,037) 3,436 6,822
1992-93 5,663 1,448 883 - 2,897 5,228 (1,946) 3,282 8,945
14
1993-94 8,159 1,010 1,636 - 2,577 5,222 (2,073) 3,149 11,308
1994-95 8,772 1,254 1,057 16 2,734 5,060 (3,203) 1,858 10,630
1995-96 5,297 3,037 1,196 16 3,414 7,662 (1,956) 5,706 11,003
1996-97 4,920 4,489 1,193 16 3,600 9,298 (1,823) 7,474 12,395
1997-98 5,305 5,296 1,405 16 3,749 10,465 (2,153) 8,313 13,618
1998-99 4,617 6,360 1,366 808 4,623 13,157 (3,031) 10,126 14,743
1999-00 5,666 8,098 1,321 900 4,289 14,608 (3,210) 11,398 17,064
2000-01 4,812 10,107 1,305 988 4,369 16,769 (2,654) 14,115 18,927
2001-02 7,230 12,834 1,278 1,008 4,729 19,849 (6,507) 13,343 20,573
2002-03 11,810 7,353 1,282 1,142 4,847 14,624 (4,992) 9,632 21,442
2003-04 13,542 11,848 1,241 1,241 5,852 20,182 (9,854) 10,328 23,870
2004-05 14,678 15,674 1,106 1,341 6,133 24,254 (11,532) 12,722 27,400
2005-06 18,640 24,983 1,016 1,430 6,346 33,775 (18,461) 15,314 33,955
2006-07 28,758 25,075 988 1,576 6,442 34,081 (23,417) 10,664 39,423
2007-08 32,814 25,928 946 1,697 7,334 35,905 (21,157) 14,748 47,562
2008-09 43,228 28,472 853 2,022 6,847 38,194 (18,672) 19,522 62,749
2009-10 61,181 21,471 831 2,589 6,614 31,505 (18,543) 12,962 74,143
2010-11 61,342 31,711 777 3,144 18,609 54,240 (25,847) 28,392 89,734
2011-12 68,930 37,855 1,182 3,599 22,627 65,263 (36,390) 28,873 97,803
2012-13 103,246 27,069 1,355 4,180 10,219 42,823 (33,579) 9,243 112,489
2013-14 147,497 3,841 1,203 4,273 6,279 15,595 (33,217) (17,621) 129,875
2014-15 177,394 811 2,161 4,646 5,659 13,276 (42,188) (28,912) 148,482
15
2015-16 218,904 13,374 2,016 4,967 6,024 26,381 (52,083) (25,703) 193,201
2016-17 252,027 12,978 2,158 4,977 5,054 25,167 (52,534) (27,368) 224,659
2017-18 253,510 22,572 2,368 5,146 5,583 35,669 (55,436) (19,767) 233,743
2018-19 257,195 31,189 2,380 4,790 5,387 43,746 (54,754) (11,008) 246,188
2019-20 286,041 42,117 2,552 5,343 13,765 63,776 (65,334) (1,558) 284,483
Table-5: Money Multiplier & It’s Components
Currency- Cash Reserve- Excess reserve- Money Multiplier

Year Deposit Ratio Deposit Ratio Deposit Ratio
(1+c/d)/(c/d+rr+e/d)
(c/d) (rr) (e/d)
1971-72 2.3
0.40 0.05 0.15
1972-73 2.7
0.43 0.05 0.04
1973-74 2.9
0.39 0.05 0.04
1974-75 3.1
0.33 0.06 0.04
1975-76 3.1
0.34 0.06 0.03
1976-77 3.4
0.30 0.06 0.02
1977-78 3.2
0.35 0.06 0.01
1978-79 3.4
0.32 0.05 0.02
1979-80 3.2
0.31 0.06 0.04
1980-81 3.3
0.31 0.05 0.03
1981-82 3.7
0.28 0.05 0.02
1982-83 3.9
0.27 0.05 0.00
16
1983-84 3.9
0.26 0.05 0.00
1984-85 4.1
0.23 0.05 0.02
1985-86 4.3
0.22 0.05 0.01
1986-87 4.3
0.20 0.05 0.02
1987-88 3.6
0.20 0.11 0.02
1988-89 3.8
0.19 0.11 0.01
1989-90 3.8
0.19 0.11 0.01
1990-91 3.9
0.20 0.09 0.02
1991-92 4.4
0.19 0.06 0.03
1992-93 3.6
0.19 0.06 0.08
1993-94 3.4
0.20 0.06 0.10
1994-95 3.9
0.20 0.06 0.05
1995-96 4.1
0.20 0.06 0.03
1996-97 4.1
0.20 0.06 0.04
1997-98 4.1
0.19 0.06 0.04
1998-99 4.2
0.18 0.06 0.05
1999-00 4.4
0.17 0.05 0.05
2000-01 4.7
0.17 0.04 0.04
2001-02 4.9
0.16 0.04 0.03
2002-03 5.4
0.15 0.04 0.02
2003-04 5.5
0.15 0.04 0.01
2004-05 5.6
0.15 0.05 0.00
17
2005-06 5.4
0.16 0.05 0.00
2006-07 5.4
0.16 0.05 0.00
2007-08 5.3
0.17 0.05 0.00
2008-09 4.8
0.15 0.05 0.03
2009-10 5.0
0.16 0.06 0.01
2010-11 5.0
0.16 0.06 0.01
2011-12 5.4
0.14 0.07 0.01
2012-13 5.4
0.14 0.06 0.00
2013-14 5.5
0.14 0.07 0.00
2014-15 5.4
0.14 0.07 0.00
2015-16 4.8
0.17 0.07 0.01
2016-17 4.6
0.17 0.07 0.01
2017-18 4.8
0.16 0.06 0.02
2018-19 5.0
0.16 0.06 0.01
2019-20 4.9
0.18 0.04 0.02
18
Table-6: Money Multiplier & It’s Sources
Ratio
Currency
End of Money Monetary Multipl in Cash Excess Total Multiplie
Period Supply Base ier Circulati Reserve Reserve Deposit C/D R/D E/D r
on
e=a f=b/ G=c h=(1+e)/

1 2 3=(1/2) a b c d
/d d /d (e+f+g)
1971-
699.21 314.63 2 211.21 27.28 75.94 523.61 0.4 0.05 0.15 2
72
1972-
989.11 371.53 3 305.39 36.97 28.87 702.68 0.43 0.05 0.04 3
73
1973-
1,244.50 438 3 352.2 45.7 39.9 913.2 0.39 0.05 0.04 3
74
1974-
1,259.60 408.7 3 316.8 53.8 38 969.3 0.33 0.06 0.04 3
75
1975-
1,396.90 462.5 3 364.2 61.8 36.4 1,066.90 0.34 0.06 0.03 3
76
1976-
1,739.90 528 3 421.8 77.2 28.8 1,383.40 0.3 0.06 0.02 3
77
1977-
2,141.10 679.7 3 570.7 91.2 17.4 1,636.40 0.35 0.06 0.01 3
78
1978-
2,760.00 847.1 3 693.3 117 36.7 2,146.60 0.32 0.05 0.02 3
79
1979-
3,245.00 1,046.10 3 796.6 142.5 106.8 2,551.40 0.31 0.06 0.04 3
80
1980-
4,100.00 1,269.50 3 1,005.00 174.6 89.7 3,221.00 0.31 0.05 0.03 3
81
1981-
4,548.70 1,266.80 4 1,013.10 196.7 56.9 3,671.10 0.28 0.05 0.02 4
82
1982-
5,898.20 1,543.70 4 1,285.10 257.3 0.6 4,758.90 0.27 0.05 0 4
83
1983-
8,385.80 2,198.00 4 1,791.80 372 34 6,829.30 0.26 0.05 0 4
84
1984-
10,534.20 2,612.10 4 1,998.60 478.1 135.2 8,811.10 0.23 0.05 0.02 4
85
19
1985-
12,338.10 2,967.80 4 2,291.50 569 106.8 10,384.50 0.22 0.05 0.01 4
86
1986-
14,353.10 3,406.70 4 2,436.90 673.8 294.4 12,276.60 0.2 0.05 0.02 4
87
1987-
16,408.00 4,698.80 3 2,817.30 1,569.90 311.6 13,993.00 0.2 0.11 0.02 4
88
1988-
19,078.10 5,115.00 4 3,048.10 1,875.10 191.8 16,462.50 0.19 0.11 0.01 4
89
1989-
22,297.60 5,923.80 4 3,694.30 2,115.50 114 19,109.30 0.19 0.11 0.01 4
90
1990-
25,004.40 6,538.00 4 4,235.70 1,913.30 389 21,392.60 0.2 0.09 0.02 4
91
1991-
28,525.90 6,656.80 4 4,671.30 1,366.20 619.3 24,453.30 0.19 0.06 0.03 4
92
1992-
31,535.60 8,840.30 4 5,019.00 1,531.20 2,290.10 27,055.50 0.19 0.06 0.08 4
93
1993-
36,403.00 10,957.50 3 6,107.50 1,754.80 3,095.20 30,987.00 0.2 0.06 0.1 3
94
1994-
42,212.30 10,953.80 4 7,188.50 2,012.20 1,753.10 35,647.20 0.2 0.06 0.05 4
95
1995-
45,690.50 11,204.90 4 7,899.30 2,179.70 1,125.90 38,567.20 0.2 0.06 0.03 4
96
1996-
50,627.30 12,556.70 4 8,454.70 2,427.60 1,674.40 43,052.70 0.2 0.06 0.04 4
97
1997-
55,869.00 13,795.60 4 9,076.60 2,716.90 2,002.10 47,715.70 0.19 0.06 0.04 4
98
1998-
63,026.70 15,414.50 4 9,713.50 3,089.70 2,611.30 54,340.10 0.18 0.06 0.05 4
99
1999- 11,264.4
74,762.40 17,099.40 4 2,928.40 2,906.60 64,586.40 0.17 0.05 0.05 4
00 0
2000- 12,832.8
87,174.10 19,494.40 4 3390.6 3271.0 75,695.90 0.17 0.04 0.04 5
01 0
2001- 13,880.2
98,616.00 20,573.00 5 3,842.46 2,841.04 86,075.30 0.16 0.04 0.03 5
02 0
2002- 113,994.3 15,342.1 100,079.0
21,441.30 5 4,390.68 1,694.82 0.15 0.04 0.02 5
03 0 0 0
2003- 129,721.7 17,287.4 113,886.3
23,870.40 5 4,956.55 1,602.05 0.15 0.04 0.01 6
04 0 0 0
20
2004- 151,446.4 20,327.9 132,892.2
27,400.40 6 6,663.34 373.06 0.15 0.05 0 6
05 0 0 0
2005- 180,674.2 24,894.1 157,761.5
33,954.70 5 8,622.67 387.33 0.16 0.05 0 5
06 0 0 0
2006- 211,504.2 28,787.4 184,798.7
39,422.70 5 10,010.1 563.42 0.16 0.05 0 5
07 0 0 0
2007- 248,794.9 35,648.5 215,998.1
47,562.10 5 11,750.7 56.43 0.17 0.05 0 5
08 0 0 0
2008- 296,499.9 39,448.7 260,309.5
62,749.40 5 14,132.0 9,027.46 0.15 0.05 0.03 5
09 0 0 0
2009- 363,031.1 50,465.4 316,664.6
74,142.80 5 18,741.5 4,726.46 0.16 0.06 0.01 5
10 0 0 0
2010- 440,520.0 60,526.9 385,525.1
89,734.40 5 24,955.9 4,051.76 0.16 0.06 0.01 5
11 0 0 0
2011- 517,109.5 64,896.5 458,448.5
97,802.70 5 29,830.8 2,831.48 0.14 0.07 0.01 5
12 0 0 0
2012- 603,505.4 112,489.4 75,372.3 535,638.8
5 34,767.9 2,035.41 0.14 0.06 0 5
13 0 0 0 0
2013- 700,623.5 129,875.3 85,485.2 623,322.7
5 43,496.1 501.56 0.14 0.07 0 5
14 0 0 0 0
2014- 787,613.7 148,482.0 98,153.9 699,183.7
5 48,944.1 894.79 0.14 0.07 0 5
15 0 0 0 0
2015- 916,377.9 193,201.3 132,305. 793,706.3
5 55,674.1 4,624.84 0.17 0.07 0.01 5
16 0 0 20 0
2016- 1,016,076. 224,659.4 151,265. 877,882.8
5 61,642.2 11,090.43 0.17 0.07 0.01 5
17 10 0 20 0
2017- 1,109,981. 233,741.4 154,940. 968,304.4
5 55,721.0 22,320.84 0.16 0.06 0.02 5
18 00 9 50 0
2018- 1,219,611. 246,111.3 170,387. 1,064,536.
5 60,993.1 13,942.63 0.16 0.06 0.01 5
19 50 9 10 00
2019- 1,373,735. 284,480.0 208,094. 1,180,999.
5 49,693.3 26,071.66 0.18 0.04 0.02 5
20 00 7 10 50
Source: Based on Monthly Economic Trends, Bangladesh Bank.
21
Table-7: Narrow Money M1 to Broad Money M2 Ratio
Year M2 M1 Ratio
1996-97 50,627.30 15,167.00 0.30
1997-98 55,869.00 15,888.50 0.28
1998-99 63,026.70 17,249.40 0.27
1999-00 74,762.40 19,881.30 0.27
2000-01 87,174.10 22,347.40 0.26
2001-02 98,616.00 24,161.10 0.25
2002-03 113,994.30 26,743.20 0.23
2003-04 129,721.70 30,448.00 0.23
2004-05 151,446.40 35,404.10 0.23
2005-06 180,674.20 42,652.30 0.24
2006-07 211,504.20 50,168.00 0.24
2007-08 248,794.90 59,314.40 0.24
2008-09 296,499.90 66,426.90 0.22
2009-10 363,031.10 87,988.30 0.24
2010-11 440,520.00 103,101.10 0.23
2011-12 517,109.50 109,721.40 0.21
2012-13 603,505.40 123,603.10 0.20
2013-14 700,623.50 141,645.10 0.20
2014-15 787,613.70 160,813.80 0.20
2015-16 916,377.90 212,430.70 0.23
2016-17 1,016,076.10 240,078.50 0.24
2017-18 1,109,981.00 254,893.70 0.23
2018-19 1,219,611.50 273,293.40 0.22
2019-20 1,373,735.00 328,263.90 0.24
22
Table-8: Broad Money Supply to GDP Ratio
Year GDP Money Supply M2/GDP

Taka in Crores Taka in Crores %
1971-72 4,405.10 699.21 16%
1972-73 6,897.70 989.11 14%
1973-74 12,394.90 1,244.50 10%
1974-75 10,139.30 1,259.60 12%
1975-76 9,987.40 1,396.90 14%
1976-77 13,920.40 1,739.90 12%
1977-78 16,390.90 2,141.10 13%
1978-79 18,763.30 2,760.00 15%
1979-80 21,979.90 3,245.00 15%
1980-81 25,132.00 4,100.00 16%
1981-82 27,295.30 4,548.70 17%
1982-83 33,106.80 5,898.20 18%
1983-84 39,516.80 8,385.80 21%
1984-85 44,071.10 10,534.20 24%
1985-86 50,911.90 12,338.10 24%
1986-87 56,444.10 14,353.10 25%
1987-88 62,199.70 16,408.00 26%
1988-89 100,329.00 19,078.10 19%
1989-90 110,518.00 22,297.60 20%
1990-91 119,542.00 25,004.40 21%
1991-92 125,370.00 28,525.90 23%
1992-93 135,412.00 31,535.60 23%
1993-94 152,518.00 36,403.00 24%
1994-95 166,324.00 42,212.30 25%
1995-96 180,701.00 45,690.50 25%
1996-97 200,177.00 50,627.30 25%
1997-98 219,697.00 55,869.00 25%
1998-99 237,086.00 63,026.70 27%
1999-00 253,546.00 74,762.40 29%
2000-01 273,201.00 87,174.10 32%
2001-02 300,580.00 98,616.00 33%
2002-03 332,973.00 113,994.30 34%
2003-04 370,707.00 129,721.70 35%
23
2004-05 415,728.00 151,446.40 36%
2005-06 482,337.00 180,674.20 37%
2006-07 549,800.00 211,504.20 38%
2007-08 628,682.00 248,794.90 40%
2008-09 705,072.00 296,499.90 42%
2009-10 797,539.00 363,031.10 46%
2010-11 915,829.00 440,520.00 48%
2011-12 1,055,204.00 517,109.50 49%
2012-13 1,198,923.00 603,505.40 50%
2013-14 1,343,674.00 700,623.50 52%
2014-15 1,515,802.00 787,613.70 52%
2015-16 1,732,864.00 916,377.90 53%
2016-17 1,975,817.00 1,016,076.10 51%
2017-18 2,250,481.00 1,109,981.00 49%
2018-19 2,542,484.00 1,219,611.50 48%
2019-20 2,796,378.00 1,373,735.00 49%
Table-9: Bangladesh Income Velocity of Inflation, GDP Growth &

M2 Growth Rate
Broad Money Supply GDP Growth Income Velocity Inflation

End of Period
Growth Rate Rate of Money Rate
1996-97 10.82 4.49 3.60 3.96
1997-98 10.17 5.18 3.60 8.66
1998-99 12.81 4.67 3.50 7.06
1999-00 18.62 5.29 3.20 2.79
2000-01 16.60 5.08 2.90 1.94
2001-02 13.13 3.83 2.80 2.79
2002-03 15.59 4.74 2.60 4.38
2003-04 13.84 5.24 2.60 5.83
24
2004-05 16.79 6.54 2.50 6.48
2005-06 19.51 6.67 2.30 7.16
2006-07 17.02 7.06 2.20 7.20
2007-08 17.59 6.01 2.19 9.94
2008-09 19.17 5.05 2.07 6.66
2009-10 22.44 5.57 1.91 7.31
2010-11 21.34 6.46 1.80 8.80
2011-12 17.39 6.52 1.78 10.62
2012-13 16.71 6.01 1.72 6.78
2013-14 15.46 6.06 1.92 7.35
2014-15 16.09 6.55 1.92 6.40
2015-16 16.35 7.11 1.89 5.92
2016-17 10.88 7.28 1.93 5.44
2017-18 9.24 7.86 2.03 5.78
2018-19 9.88 8.15 2.08 5.48
2019-20 12.64 3.80 2.04 5.65

25
Table-10: Regression Model for Narrow Money Supply M1
REGRESSION MODEL FOR M1
Foreign Inflation Money

Monetary
Year GDP Resources Rate TNBB Reserve (R) NDA Supply
Base (MB)
(FR) (IR) (M1)
Taka in
Taka in Crores Taka in Crores % No. Taka in Crores Taka in Crores Taka in Crores
Crores
1996-97 12,394.50 200,177.00 8,018.84 3.96 9,530 4,102.00 44,174.60 15,167.00
1997-98 13,617.60 219,697.00 8,673.80 8.66 9,569 4,719.00 49,167.30 15,888.50
1998-99 14,742.70 237,086.00 9,721.08 7.06 9,599 5,701.00 56,716.50 17,249.40
1999-00 17,064.10 253,546.00 11,409.13 2.79 9,663 5,835.00 66,493.60 19,881.30
2000-01 18,927.40 273,201.00 11,476.71 1.94 9,768 6,661.60 80,020.50 22,347.40
2001-02 20,573.00 300,580.00 15,946.88 2.79 9,850 6,683.50 89,382.10 24,161.10
2002-03 21,441.50 332,973.00 20,198.41 4.38 9,557 6,085.50 100,403.20 26,743.20
2003-04 23,870.40 370,707.00 22,579.39 5.83 9,624 6,558.60 113,808.10 30,448.00
2004-05 27,400.40 415,728.00 26,554.65 6.48 9,706 7,036.40 133,228.10 35,404.10
2005-06 33,954.70 482,337.00 35,749.39 7.16 9,814 9,010.00 159,163.30 42,652.30
2006-07 39,422.70 549,800.00 46,375.74 7.20 9,979 10,573.60 179,123.20 50,168.00
2007-08 47,562.10 628,682.00 60,443.96 9.94 10,130 11,806.70 211,498.90 59,314.40
2008-09 62,749.40 705,072.00 74,147.41 6.66 10,323 23,159.50 249,057.80 66,426.90
2009-10 74,142.80 797,539.00 86,760.68 7.31 10,640 23,468.00 295,981.60 87,988.30
2010-11 89,734.40 915,829.00 93,920.49 8.80 11,126 29,007.70 369,946.50 103,101.10
26
2011-12 97,802.70 1,055,204.00 112,247.18 10.62 11,508 32,662.30 438,290.80 109,721.40
2012-13 112,489.40 1,198,923.00 130,961.36 6.78 11,926 36,803.40 490,120.60 123,603.10
2013-14 129,875.30 1,343,674.00 132,090.37 7.35 12,330 43,997.70 540,566.90 141,645.10
2014-15 148,482.00 1,515,802.00 144,007.52 6.40 12,800 49,838.90 598,392.50 160,813.80
2015-16 193,201.30 1,732,864.00 147,024.95 5.92 13,153 60,299.00 683,242.20 212,430.70
2016-17 224,659.40 1,975,817.00 134,591.91 5.44 13,433 72,732.70 749,379.10 240,078.50
2017-18 233,743.00 2,250,481.00 156,099.46 5.78 13,855 78,041.89 845,306.60 254,893.70
2018-19 246,187.70 2,542,484.00 170,723.08 5.48 14,155 74,935.79 947,212.00 273,293.40
2019-20 284,483.40 2,796,378.00 190,205.63 5.65 14,363 75,764.97 1,076,398.80 328,263.90

Table-10.1: Regression Output for Narrow Money Supply M1
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.999888947
R Square 0.999777907
Adjusted R Square 0.999680741
Standard Error 1693.943723
Observations 24
ANOVA
Significance
df SS MS F F
27
Regression 7 2.06674E+11 29524864323 10289.4 5.25411E-28
Residual 16 45911125.37 2869445.336
Total 23 2.0672E+11
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 36999.21341 27729.15922 1.334307 0.200784 -21783.97816 95782.40499
Monetary Base 1.31590 0.083943734 15.67599 3.94E-11 1.137948622 1.493854154
GDP 0.00132 0.012326633 0.106936 0.916169 -0.024813138 0.027449453
Foreign Resources 0.01813 0.048385869 0.374663 0.71283 -0.08444505 0.120701871
Inflation Rate 119.08257 219.9550035 0.541395 0.595694 -347.2012116 585.3663433
TNBB -3.84508 2.921422715 -1.31617 0.206663 -10.03821996 2.348059029
Reserve -0.97260 0.183915611 -5.2883 7.35E-05 -1.36248546 -0.582718101
NDA 0.03537 0.045573444 0.776003 0.449067 -0.061246275 0.131976495
Table-11: Regression Model for Broad Money Supply M2
REGRESSION MODEL FOR M2
Foreign Inflation
Monetary Reserve Time Money
Year GDP Resources Rate TNBB NDA
Base (MB) ( R) Deposit (TD) Supply (M2)
(FR) (IR)
Taka in Taka in Taka in
Taka in Crores % No. Taka in Crores Taka in Crores Taka in Crores
Crores Crores Crores
1996-97 12,394.50 200,177.00 8,018.84 3.96 9530 4,102 44,174.60 35,460.30 50,627.30
1997-98 13,617.60 219,697.00 8,673.80 8.66 9569 4,719 49,167.30 39,980.50 55,869.00
1998-99 14,742.70 237,086.00 9,721.08 7.06 9599 5,701 56,716.50 45,777.30 63,026.70
1999-00 17,064.10 253,546.00 11,409.13 2.79 9663 5,835 66,493.60 54,881.10 74,762.40
2000-01 18,927.40 273,201.00 11,476.71 1.94 9768 6,662 80,020.50 64,826.80 87,174.10
28
2001-02 20,573.00 300,580.00 15,946.88 2.79 9850 6,684 89,382.10 74,454.90 98,616.00
2002-03 21,441.50 332,973.00 20,198.41 4.38 9557 6,086 100,403.20 87,251.10 113,994.30
2003-04 23,870.40 370,707.00 22,579.39 5.83 9624 6,559 113,808.10 99,273.70 129,721.70
2004-05 27,400.40 415,728.00 26,554.65 6.48 9706 7,036 133,228.10 116,042.30 151,446.40
2005-06 33,954.70 482,337.00 35,749.39 7.16 9814 9,010 159,163.30 138,021.90 180,674.20
2006-07 39,422.70 549,800.00 46,375.74 7.20 9979 10,574 179,123.20 161,336.20 211,504.20
2007-08 47,562.10 628,682.00 60,443.96 9.94 10130 11,807 211,498.90 189,480.50 248,794.90
2008-09 62,749.40 705,072.00 74,147.41 6.66 10323 23,160 249,057.80 230,073.00 296,499.90
2009-10 74,142.80 797,539.00 86,760.68 7.31 10640 23,468 295,981.60 275,042.80 363,031.10
2010-11 89,734.40 915,829.00 93,920.49 8.80 11126 29,008 369,946.50 337,418.90 440,520.00
2011-12 97,802.70 1,055,204.00 112,247.18 10.62 11508 32,662 438,290.80 407,388.10 517,109.50
2012-13 112,489.40 1,198,923.00 130,961.36 6.78 11926 36,803 490,120.60 479,902.30 603,505.40
2013-14 129,875.30 1,343,674.00 132,090.37 7.35 12330 43,998 540,566.90 558,978.40 700,623.50
2014-15 148,482.00 1,515,802.00 144,007.52 6.40 12800 49,839 598,392.50 626,799.90 787,613.70
2015-16 193,201.30 1,732,864.00 147,024.95 5.92 13153 60,299 683,242.20 703,947.20 916,377.90
2016-17 224,659.40 1,975,817.00 134,591.91 5.44 13433 72,733 749,379.10 775,997.60 1,016,076.10
2017-18 233,743.00 2,250,481.00 156,099.46 5.78 13855 78,042 845,306.60 855,087.30 1,109,981.00
2018-19 246,187.70 2,542,484.00 170,723.08 5.48 14155 74,936 947,212.00 946,318.10 1,219,611.50
2019-20 284,483.40 2,796,378.00 190,205.63 5.65 14363 75,765 1,076,398.80 1,045,471.10 1,373,735.00
29
Table-11.1: Regression Output for Broad Money Supply M2
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.999994979
R Square 0.999989958
Adjusted R
Square 0.999984602
Standard Error 1634.41711
Observations 24
ANOVA
Significance
df SS MS F F
Regression 8 3.99016E+12 4.9877E+11 186713.1 4.61142E-36
Residual 15 40069789.37 2671319.29
Total 23 3.9902E+12
Standard Upper
Coefficients Error t Stat P-value Lower 95% 95%
Intercept -1565.72523 37362.76 -0.04191 0.967126 -81202.6 78071.11
Monetary Base 1.33965 0.082571 16.2242 6.38E-11 1.163658 1.515652
GDP 0.00917 0.013024 0.703876 0.492293 -0.01859 0.036928
Foreign
Resources 0.03822 0.048623 0.786133 0.444032 -0.06541 0.141862
Inflation Rate 94.03719 212.9006 0.441695 0.665011 -359.75 547.8241
TNBB 0.18199 3.91944 0.046432 0.963579 -8.1721 8.536074
Reserve -0.99056 0.177868 -5.56907 5.37E-05 -1.36967 -0.61144
NDA 0.05107 0.045236 1.128889 0.276676 -0.04535 0.147484
Time Deposit 0.93579 0.043425 21.54955 1.07E-12 0.843229 1.028345
30
Table-12: Total Credit to Government (Gross) by Banking System
BB DMBs Total
Credit to
End of Govt. % of
Period ***Loans & Advances & (1+2+3+4) GDP
Investment
Advances Bills Investment
1 2 3 4 5
1973-74 20 347.5 … 119.3 486.8 0.04
1974-75 20 399.3 56.7 155.4 631.4 0.06
1975-76 20 517.9 31.7 177 746.6 0.07
1976-77 20 410.2 65 248.1 743.3 0.05
1977-78 20 524.4 49.6 255 849 0.05
1978-79 20 471.9 89.9 272.5 854.3 0.05
1979-80 20 688.6 162.4 249.4 1,120.40 0.05
1980-81 20 1,220.10 140.1 347.7 1,727.90 0.07
1981-82 20 1,206.80 127.8 377.2 1,731.80 0.06
1982-83 20 962.1 129.5 619.4 1,731.00 0.05
1983-84 20 924.7 410.7 902.6 2,258.00 0.06
1984-85 20 972.9 374.2 869.9 2,237.00 0.05
1985-86 1,022.10 203.4 956.7 2,182.20 0.04

-
1986-87 20 1,005.60 184.4 1,258.00 2,468.00 0.04
1987-88 34.3 1,203.00 559.6 1,072.90 2,869.80 0.05
1988-89 12.5 946.6 341.3 1,340.60 2,641.00 0.03
1989-90 31.9 1,659.00 447.9 1,260.30 3,399.10 0.03
1990-91 31 1,723.50 549.9 1,646.00 3,950.40 0.03
1991-92 30.3 1,315.30 468.1 4,067.80 5,881.50 0.05
1992-93 25.8 1,632.10 347 4,816.50 6,821.40 0.05
1993-94 25.8 1,224.10 466 5,282.30 6,998.20 0.05
1994-95 25.2 1,429.90 484 6,194.90 8,134.00 0.05
1995-96 69.1 2,770.20 391 6,178.50 9,408.80 0.05
1996-97 69.1 4,158.30 398.7 6,628.60 11,254.70 0.06
1997-98 69.1 4,964.50 516 7,633.20 13,182.80 0.06
31
1998-99 69.1 6,027.50 866.8 8,929.30 15,892.70 0.07
1999-00 69.1 7,765.80 633 11,657.20 20,125.10 0.08
2000-01 69.1 9,700.00 817.5 12,661.00 23,247.50 0.09
2001-02 69.1 13,189.20 1,146.20 11,840.50 26,245.00 0.09
2002-03 69.1 12,475.70 1,189.20 12,162.70 25,896.70 0.08
2003-04 89 11,379.90 948.6 15,142.80 27,560.30 0.07
2004-05 84 15,262.40 670.7 18,832.00 34,849.10 0.08
2005-06 69.1 24,581.60 765.6 17,060.00 42,476.30 0.09
2006-07 1,005.10 24,550.10 920.4 21,346.10 47,821.70 0.09
2007-08 2,271.40 23,252.40 1,119.90 35,472.70 62,116.40 0.1
2008-09 3,973.00 28,474.10 2,797.60 44,754.70 79,999.40 0.11
2009-10 5.1 21,788.20 3,141.20 49,111.50 74,046.00 0.09
2010-11 10,732.90 20,625.20 2,591.00 63,715.10 97,664.20 0.11
2011-12 9,829.80 27,482.10 3,379.10 82,057.90 122,748.90 0.12
2012-13 9,204.50 21,263.20 3,720.10 123,280.00 157,467.80 0.13
2013-14 78.1 16,886.20 2,769.50 152,495.40 172,229.20 0.13
2014-15 2,435.40 8,796.40 3,334.20 155,768.80 170,334.80 0.11
2015-16 4,000.00 15,984.80 3,911.60 156,583.50 180,479.90 0.1
2016-17 3,015.60 10,964.50 3,364.40 151,102.30 168,446.80 0.09
2017-18 4,000.00 17,878.90 4,818.00 151,396.00 178,092.90 0.08
2018-19 1,422.90 30,233.00 4,900.80 168,433.90 204,990.60 0.08
2019-20 10,631.00 36,086.90 4,710.30 229,191.60 280,619.80 0.1
32
Chapter 4: Empirical Analysis
Money Supply
In economics, the money supply refers to all of the cash and currency in circulation within a
country. A country’s money supply has a significant effect on a country’s macroeconomic profile,
particularly in relation to interest rates, inflation, and the business cycle. The money supply
roughly includes both cash and deposits that can be used almost as easily as cash. Governments
issue paper currency and coin through some combination of their central banks and treasuries.
Bank regulators influence money supply available to the public through the requirements placed
on banks to hold reserves, how to extend credit and other regulation.
An increase in the supply of money typically lowers interest rates, which in turn, generates
more investment and puts more money in the hands of consumers, thereby stimulating spending.
Businesses respond by ordering more raw materials and increasing production. The increased
business activity raises the demand for labor. The opposite can occur if the money supply falls or
when its growth rate declines.
The various types of money in the money supply are generally classified as MS, such as M0,
M1, M2 and M3, according to the type and size of the account in which the instrument is kept.
Not all of the classifications are widely used, and each country may use different classifications.
The money supply reflects the different types of liquidity each type of money has in the economy.
It is broken up into different categories of liquidity or spend ability.
M1 is also called narrow money and includes coins and notes that are in circulation and other
money equivalents that can be converted easily to cash. M2 includes M1 and, in addition, short-
term time deposits in banks and certain money market funds.1 M3 includes M2 in addition to long-
term deposits. However, M3 is no longer included in the reporting by the Federal Reserve. MZM,
or money zero maturity, is a measure that includes financial assets with zero maturity and that are
immediately redeemable at par. The Federal Reserve relies heavily on MZM data because its
velocity is a proven indicator of inflation.
In Bangladesh, we use Narrow Money (M1) & Broad Money (M2) classification of the Money
Supply. For this term paper, we have collected the last 50 years of Narrow Money & Broad Money
Supply Data & show its component’s along with the sources of money supply in Bangladesh.
33
Components of Money Supply
In Table-1 we have shown the component of Money Supply M1 & M2 in Bangladesh for last 50
years.
M1 consist of Currency in circulation (C) which includes the notes and coins that we use excluding
currency in tills of DMB plus Demand Deposits (DD) in the banking system by DMB & other
Financial Institutions. Deposits are also money, because they can be converted into currency and
are used to settle debts e.g., current account, savings account, traveler's check etc.
So, we can write the equation as: 𝑴𝟏 = 𝑪 + 𝑫𝑫 … … … (𝟏)
Here, M1 consist of we measure Narrow money supply (M1) by the total amount of Currency
outside the bank plus Demand Deposit by the banking system (Deposit by DMB & Deposit by
Other Financial Institutions).
Broad money includes all liabilities of the banking system in the long term which includes in Time
Deposits (TD) also included the narrow money as well.
So, we can write the equation as: 𝑴𝟐 = 𝑴𝟏 + 𝑻𝑫 … … … (𝟐)
We got the early values of Broad Money (M2) by adding Time Deposit with Narrow Money
Supply.
Narrow Money (M1)
In Table-1 we see last 49 years of Money Supply amount of Bangladesh. Most of the year the
values were dominated by the amount of deposit which mean Demand deposit has more
contribution than currency outside bank in the amount of money supply at first 30 years of
independence. In recent 20 years currency dominate over the demand deposit.
According to data, Initially the Demand deposit was higher than the currency outside bank which
form the narrow money but after FY 1997-98 the Demand deposit was increasing at lower rate as
a result currency was the majority portion of money supply M1 since 1998 to 2020. The reason
behind this might be the lower deposit rate offer by banks. People discouraged by lower deposit
rate also govt. monetary expansion policy effect it. Our overall money supply M1 has increased
each year though there are some fluctuations among the growth rate. The average M1 over the last
49 years is Tk. 55,000 crores.
34
Broad Money (M2)
As we have already mentioned, Broad Money include all liabilities of banking system. Which
means include time deposit with Narrow money supply. Historically Time Deposit amounts was
bigger than narrow money supply in last 49 years. After the independence the time deposit amount
was close to narrow money because at that time people did not put that much money into time
deposit & the economy was not flourished at that time but every year the amount was increased in
time deposit after 1980’s & in last 20 years FY 2001-2020 narrow money was the only average
30% of time deposit amount. But during the global financial crisis & last year pandemic timed
deposit amount was not grown at normal level. In FY 2020 the difference between m2 to m1 was
almost Tk1,000,000 crores. The average M2 over the last 49 years is Tk 230,000 crores.
Behavior of Money Supply & It’s Determinant
This section analyses the money supply determinants and the related factors that have a greater
impact on money supply process as well as monetary and credit market development in
Bangladesh during the period from 1971-1972 to 2019-2020. This chapter also discusses the trends
of the different factors and shows the ratios how their behavior creates impact on the money supply
process. Also, how the government borrowings and trends of deposits, interest rate play an
effective role on money supply in Bangladesh.
Behavior of Narrow Money M1 & Broad Money M2
Figure-1 shows the behavior of narrow money (M1) and broad money (M2). While comparing the
trends, percentage change of M2 most of the time dominates over M1 since 1971-72 to 2019-20.
Initially growth rate of M1 was higher than the M2, FY 1975-1989 the M2 growth rate was higher
than M1, during 1989-90 became slowdown in the growth of M2 remained till 1995-96 and became
equal during 2003-04, then exceeded again and remained till 2007-08 and 2009-10 M1 had higher
growth rate than M2.
So, higher growth rate of M2 prevailed from 1996-97 to 2002-03 and again slowed down in
FY2005-06 due to slower growth in time deposits and higher growth in currency demand than till
2019-20020 the M2 growth rate was higher because of time deposit growth in FY 2019-2020 the
growth rate of Time deposit was less as a result growth of M1 was higher than M2. People currency
demand increases compare to making deposit (figure-1).
35
Figure-1: Behaviour of M1 & M2
50%
40%
30%
Percentage
20%
10%
0%
1992-93
1972-73
1974-75
1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
2018-19
-10%
Fiscal Year
M1 Growth Rate M2 Growth Rate
An analysis of the component of broad money show that the growth rate of time deposits started
to increase from FY 1996-97 and maintained higher growth than that of currency and demand
deposits until FY 2003- 04. During FY 2004-05, 2005-06 and 2009-10 the growth rate of currency
demand was higher than that of demand and time deposits reflecting higher demand for holding
currency due to the higher inflationary expectation. The M1 had a 32% growth rate in 2015-16
because of the high currency demand by people & M2 had half of the M1 growth rate at that year.
M1 average growth rate yearly 15% & M2 average yearly growth rate is 17%. So, we can say M2
growth rate is overall higher than M1 except in some years of market crash & global pandemic.
It is to be accentuated that the growth of M1 and M2 depends on the three factors currency outside
banks, deposits, and inflation. From Table-1 it is clear that recently currency outside bank and
deposit deposits have been increased at a slower rate while the time deposits increased at a much
higher growth rate.
Sources of Money Supply
In Table-1 we have seen the components by which money supply build. Now, in Table-2 we will
find out the actual sources from which the money supply comes from. Sources of money supply
(M2) depends on several components, such as Net Foreign Assets (NFA), Net Domestic Assets
(NDA), domestic credit including government net credit along with other public sectors credit and
private sector credit, also NDA consists of total domestic credit and Net Other Assets resulting
creates broad money(M2). NFA and NDA is a compilation of Bangladesh Bank (BB) and deposit
Money Banks (DMBs).
36
In table-2, there are two main sources of Broad Money M2, The Net Domestic Asset & The Net
Foreign Asset. For measuring broad money NFA, Bangladesh Bank & DMBs total foreign asset
equal the NFA. On the hand NDA comprise of Total domestic credit to our government, others
public sector & private sector. Net others asset also added with it.
From Table-2, Compare to the sources of broad money, NDA contribute significant portion of
broad money. NDA shows a constant positive growth over the time where as NFA growth rate are
fluctuating. The reason of high NDA is domestic credit increased in every year in three sector
Government, Public & private. After 1980’s the Private sector flourished & their demand for
domestic credit exceed the other two sector which plays a significant role in the increase in NDA
& overall broad money.
Public credit was almost stable & maintain a stable growth with the development of economy
except in 1993-94, 1998-99 public credit decrees. Suddenly we see an increase demand in public
credit during FY 2002-2007. Before the global financial crisis. In FY 2007-08 public credit
decrease almost 37%. After that in 2010-11 we see a decree in public credit almost 9% & 38%
after the following year. More than the 2007-08, because this time market effect badly & it had a
negative impact on the market. Last Year the domestic credit in private sector grow at 9% only
where public sector 25% & government 60%. Because during the pandemic public demand
increased a lot & government also need huge amount money to support the pandemic that’s why
government credit increased almost 60% among that majority are taken from DMB.
On the other hand, private sector playing dominating role on domestic credit and contribution of
public sector to domestic credit is a declining trend, which indicates that larger credit flow to the
private sector. DMBs have significant role on domestic credit. Government credit also had a
positive growth except in some years. During FY 2006-7, 2010-11, 2019-20 when the economy
was facing problem govt. Credit growth also increased compare to the normal times. Historically
BB provides more credit to govt. than DMB. But in last 10year govt. is heavily dependent on the
DMB credit. The difference between BB & DMB credit is becoming huge. It means govt. is
heavily using the fund of DMB to support the economic activity as well as the country’s
development project. After 2010-11 Bangladesh Bank decrease credit amount to government.
The NFA was very fluctuating till 1992-93. Since that period, it has become stable & fluctuation
decrease. If we look into more deeply the DMBs reserve was maintain stable amount& higher than
BB till 1990’s the reason behind the fluctuation was the Bangladesh Bank Reserve. After 1990’s
BB didn’t face any negative foreign resources & it grow in a big amount than the DMB. The
majority of NFA growth is covered by BB. Last FY 2019-2020, 96% of NFA was come from BB
& 4% come from DMB.
37
Determinants of Money Supply
Monetary Base
The monetary base or reserve money (also called high-powered money) is being used as an
operating target in the line with overall money projection, which is a part of accommodative
monetary policy and liquidity management. As a result of changing government debt management
system, the role of Bangladesh Bank has changed to conduct monetary policy. Under the new
system, Bangladesh Bank has introduced 30- day and 90-day Bangladesh Bank Bills since October
2006 to operate its monetary policy. As a result, auction of weekly Bangladesh Bank bills is being
used to control the level of monetary base and auction of repo and reverse repo is being used for
fine tuning. The monetary base equals currency in circulation plus total reserve in the
banking system.
Component of Monetary Base
The components of the MB include currency in circulation, currency held in banks, deposits of
DMBs and other deposits by NBFI which creates the monetary base for money supply. In Table-
3, we have shown the last 49 years of Monetary Base of Bangladesh where we have collected data
from 1971-72 to 2019-20. The monetary base comprises of Currency in Circulation and deposit
with BB. We have found Currency in circulation by adding Currency outside Bank plus currency
in Tills of DMBS which equal of Total currency in circulation. The major portion of Deposit with
BB is held by DMBs & a small portion is held by NBFIs. After adding the end of period value of
Currency in circulation with total deposit held with BB, we got the yearly Monetary Base of
Bangladesh.
Figure-2 shows the yearly growth rate of Monetary Base which reflect ups and downs in the growth
of MB with some major fluctuations. We have seen the highest growth 42.4% in FY 1983-84 &
a lowest -6.7% in FY 1974-75. There is a on an average 15.7% growth rate in monetary base for
last 49 years. We have face positive growth in every year except in FY 1974-75 (-6.7%), 1981-82
(-0.2%), 1994-95 (-6.0%).
An analysis of the trend in Monetary Base growth shows that our MB was facing steady high
growth after our independence to mid-90’s except at the starting of the eighties in one single year
there was almost zero growth in 1981-82. Otherwise, there was a high growth before in MB before
-6% growth in 1994-95 from 26.4% growth of last year. Suddenly our MB growth decline
drastically after that growth rate back to positive but we have never seen those high growth again
except in 2008-09 which was 31.9% & in 2015-16 which was 30.16%. Our MB has increased
almost Tk. 284,168.77 Crores in last 49 years. If we look at the graph more closely, Our MB face
some major ups & downs before mid-90’s after that it has become stable growth over the years.
38
Figure-2: Growth Rate of MB
50.0%
40.0%
30.0%
Percent
20.0%
10.0%
0.0%
2008-09
1972-73
1974-75
1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2010-11
2012-13
2014-15
2016-17
2018-19
-10.0%
Fiscal Year
Highest MB growth rate 42.4% in FY 1983-84 was the reason of a 61% increase in Currency in
Tills by DMB which cause a total 39% growth in Total Currency which is the 2nd highest growth
in last 49 years. This year deposit with BB had also increased by 57% which was also a major
reason in the highest MB Growth in the history. Suddenly in 1987-88 the deposit with BB by DMB
had increased 94% compare to last year which cause the overall growth rate of MB to 37.9%.
Again in 1992-93, Deposit with BB by DMB increased 88% which cause the increased in MB base
to 31.1%. During the global Financial crisis, deposit with BB by DMB had increased a lot in just
a single year 2008-09 to 96% which was the main reason MB face 31.9% growth in that year. In
2015-216 Currency outside bank increased 39% which cause the MB growth to 30.1% in that year.
Whenever there was a major decrease or negative result in overall MB growth the major reason
was decrease in deposit with BB by DMBs. For example, in 1994-95 the overall growth rate was
-6% when the Deposit with BB by DMB decrease 44% which had a major impact on the growth
same goes for the slower growth rate year. During the pandemic of last year, Currency outside
bank increased a lot almost 25% which cause the MB growth 15.6% though Deposit with BB by
DMB growth was insignificant close to 1%.
Above this analysis we can say that the major increase or decrease in Monetary Base in last 49
years was because of deposit with BB by DMB & in some case Currency outside the bank.
39
Sources of Monetary Base
In table-4 we have shown the sources of our monetary base from FY 1990-91 to 2019-20. Some
of the variable of MB source was not available for previous years. So, we start from the 1990-91.
In this table we tried to show a detailed picture of each sources value of our Monetary Base.
Figure-3: Growth Rate of NFA, NDA & MB

300%
200%
100%
0%
Percent
1999-00
2012-13
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
-100%
-200%
-300%
NFA Grwoth Rate NDA Growth Rate MB Growth Rate
-400%
Fiscal Year
The major two sources of Monetary Base is Net Foreign Asset (NFA) & Net Domestic Asset
(NDA). Compare to NDA, NFA is more stable & show overall positive growth over the years. On
the other hand, NDA had faced some major fluctuation and consistently facing negative for last 3
years. For first 4/5 years there was no official record of Domestic credit to Private sector. It might
be one reason for negative NDA growth in first couple of years.
After analyzing more deeply we found that 31.1% growth in MB FY 1992-93 was mainly the
reason of 67% growth of NFA & same goes for the following year. After that in 1994-95 there
was a negative 6% growth the reason was a huge decrease in NDA which was -41% & a small
increase in NFA in that year. But suddenly next year BB provide government a huge credit which
cause the NDA growth increase 207% but the MB growth was only 3.5% in that year because of
NFA face 40% negative growth in that year. In FY 2010-11, there was a zero growth in NFA still
MB grow 21% because in that year NDA face 119% positive growth. In that year BB provide
Government almost 10,000 crores & DMB almost 12,000 crores Tk. Which cause a huge growth
in NDA. Suddenly 2013-14, BB decides not provide huge credit to government & claims on DMB
also decrease which cause a negative 291% growth in NDA. 4% growth in MB 2017-18 was
40
mainly reason of 1% growth in NFA & a negative growth in NDA. Last year due to covid, BB
issues credit to all possible sector which cause domestic credit to increase almost 46%. But the
overall NDA was negative due to other domestic asset in negative value.
Above this analysis we can say that, Monetary Base growth rate was lower because of NDA
negative growth & NFA lower positive growth. When MB grow at high rate both NFA & NDA
had a decent positive growth which make it possible to grow MB a positive rate. Our last 8 years
of Monetary Base is basically source by NFA because of high NFA our Monetary Base is
increasing, NDA is consistently showing negative value. So, a major contribution in the increase
of Monetary base in last 8 years was our Net Foreign Asset. Remittance plays a major role in the
huge increase of Net Foreign Asset.
The Money Multiplier
In the model of money supply the Central Bank, DMBs and depositors directly influence the
money supply. The variables are grouped by the player(s) who is the primary influence behind the
variable. The central bank influences the money supply by controlling monetary base, reserves and
required reserve ratio.
The central bank can control the monetary base much more precisely than it can control reserves,
it makes sense to model the money supply process by linking the money supply to the monetary
base (MB) or high-powered money. Depositors influence the money supply through their decisions
about their holding of currency, while banks influence the money supply with their decision about
excess reserves. However, because depositors’ behavior influences bankers’ expectations about
deposit outflows, which as we have seen affects banks’ decisions to hold excess reserves,
depositors are also listed as a player determining excess reserves.
To understand how the money supply process works, we can derive all the results described above
using a concept called the money multiplier, denoted by mm, which tells us how much the money
supply changes for a given change in the monetary base.
The relationship between the money supply, the money multiplier, and the monetary base is
described by the following equation:
𝑴 = 𝒎𝒎 × 𝑴𝑩
Where,
• M = Money Supply
• mm = Money Multiplier
• MB = Monetary Base
41
The money multiplier mm tells us what multiple of the monetary base is transformed into the
money supply. Because the money multiplier is larger than 1 is logical: a Tk. 1 change in the
monetary base leads to more than a Tk. 1 change in the money supply. Also, mm will depend on
depositors’ decisions about holdings of currency and banks’ decisions about holdings of excess
reserves.
Deriving the Money Multiplier
The money multiplier is the sum of currency(C) and reserve (R)

𝑴𝑩 = 𝑪 + 𝑹 … … … … … … … . (𝟏)
The bank reserves (R) is the sum of required Reserve (RR) & Excess Reserve (ER)
𝑴𝑩 = 𝑪 + 𝑹𝑹 + 𝑬𝑹 … … … … … … (𝟐)
We can find value of Currency by Multiplying currency to deposit ratio (C./D) by Deposit,
Required Reserve by Multiplying required reserve ratio (RR/D) by deposit & Excess reserve by
Multiplying Excess Reserve ratio (ER/D) by deposit.
𝑪 𝑹𝑹 𝑬𝑹
𝑴𝑩 = ( × 𝑫) + ( × 𝑫) + ( × 𝑫)
𝑫 𝑫 𝑫
𝑴𝑩 = (( ) + ( )+( )) × 𝑫
𝑫 𝑫 𝑫
𝟏
𝑫= × 𝑴𝑩 … … … … . (𝟑)
((𝑫 ) + ( 𝑫 ) + ( 𝑫 ))
As we know, Money supply is sum of Currency plus deposit,

𝑴=𝑫+𝑪
𝑪
𝑴=𝑫+ ( × 𝑫)
𝑫
𝑪
𝑴 = (𝟏 + )×𝑫
𝑫
Substituting in this equation the expression for D from equation 3,
𝑪
(𝟏 + 𝑫)
𝑴= × 𝑴𝑩 … … … … … . (𝟒)
((𝑫 ) + ( 𝑫 ) + ( 𝑫 ))
42
As we know,
𝑴 = 𝒎𝒎 × 𝑴𝑩
The Money Multiplier mm thus,
𝑪
(𝟏 + 𝑫)
𝒎𝒎 = … … … … … … . . (𝟓)
((𝑫 ) + ( 𝑫 ) + ( 𝑫 ))
Equation (4) shows how to money supply depends on the four exogenous variables, Monetary
Base, currency-deposit ratio, reserve-deposit ratio, excess reserve ratio. We can now see that the
money supply is proportional to the Monetary Base. The factor of proportionality in equation 5 is
denoted by mm and is called the money Multiplier. Each taka of monetary base produces mm taka
of money. Because, monetary base has a multiple effect on the money supply.
Factors Affecting the Money Multiplier
Based on the complex money multiplier that we have derived above; we know that it is affected
by three factors:
1. The currency-deposit ratio (C/D)
2. The excess reserves-deposit ratio (E/D)
3. The required reserves ratio (R/D)
We have collected data and prepare Table-5 which shows the currency to deposit ratio, excess
reserve ratio, required reserve ratio & money multiplier of last 49 years. As we are working on
historical value and counting Broad Money as money supply, we have taken both demand &
time deposit as deposit in the calculation process. It is important that we know the intuitions of
how each one of those factors affect the money multiplier.
1. Currency-Deposit Ratio (C/D)
The currency ratio represents the amount of cash individuals hold relative to the amount of
checkable deposits they have with the banking system. To simplify our analysis, let us assume that
individuals store their wealth either with cash or checkable deposits. If an individual has currency
ratio of 0.7, that means he/she keeps Tk, 70 of cash for every Tk.100 he/she has in a checking
account.
43
We have seen that given everything else remains the same, as an individual’s currency ratio
increases, that simply means that the individual is transferring more of his/her wealth from
checkable deposit to currency holding. Since individuals are holding more currency and getting
less deposits (i.e., currency ratio increases), less “money” can be created by the banking system.
As a result, the money multiplier and the money supply shrink.
Behavior of Currency to Deposit ratio (C/D)
We have collected the data of how much currency in circulation & total amount of deposit. Then
we divide Currency in Circulation by Total Deposit & get the values of c/d ratio. In our Empirical
Analysis of 1972-2020, we have seen that Currency to deposit ratio after the independence was
high & then after mid-eighties it decrease & hold a steady rate till 2020.
Figure-4: Currency-Deposit Ratio

0.45
0.40
0.35
0.30
Ratio
0.25
0.20
0.15
0.10
0.05
-
1971-72
1974-75
1977-78
1980-81
1983-84
1986-87
1989-90
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
2010-11
2013-14
2016-17
2019-20
Fiscal Year
From this we can say before 1985, there was a tendency among Bangladeshi people to hold more
of their currency & they were transferring more of their wealth into currency from holding. Since
individual was holding more currency & less deposit at that time, we had a slower increase in
money supply. Or average c/d ratio is 0.22. Which means for every Tk100 deposit in bank people
want to hold Tk22 as currency.
We have already experienced that the lower C/D ratio is better for the economy. When C/D ratio
lowers, means increase the deposit in the banking system, which has a multiple dimension of
expansion of money. In this situation, banks have enough money to lend for further investment.
On the other hand, if C/D ratio raises means deposits turned into currency in hand, which has less
44
multiplication. The lower the currency-deposit ratio, the fewer Taka of the monetary base the
public holds as currency, the more money banks create. Thus, a decrease in the currency-deposit
ratio raises the money multiplier and the money supply.
As we can see from this figure-4, from 1971-90 the first 20-year average c/d ratio was 0.29 which
decline in next 30 years to 0.17. This indicates that people are in favor of deposits. This was
happened due to raising national income, increase in average GDP growth rate and increase in
deposit interest rate. As a result, people are now wanted to hold less money as currency & to get
deposit interest they hold more money in the banking system which help to increase our money
supply over the time. The trend volatility shows that C/D ratio is more or less predictable and BB
has comprehensive role over money supply. In the determination of money multiplier, currency to
deposit ratio play a significant role. It has also proven in our historical value whenever multiplier
face major fluctuation there was also a fluctuation in c/d ratio as well.
2. Reserve-Deposit Ratio (C/D)
The required reserve ratio indicates the amount of reserves a bank is required to keep for every
Tk.1 of deposits it accepts. The reserve requirement represents the portion of the deposits that is
not available to a bank to make loans. Hence, as the required reserves ratio increases, the amount
of loans a bank can make decreases. As a result, the money multiplier and the money supply shrink.
Behavior of Reserves-Deposit Ratio
The reserve to deposit ratio is one of the important tools of Bangladesh Bank’s monetary policy
stance to achieve its goals like other policy tool CRR and SLR. It is a good weapon to control
monetary base as well as money supply after the introduction of different treasury bills since 1995.
The lower the reserve-deposit ratio, the more loans bank make and the more money banks create
from every Taka of reserves. Thus, a decrease in the reserve-deposit ratio raises the money
multiplier and the money supply.
In figure-5, we take the amount of cash or statutory reserve of Schedule bank with BB to total
deposit which comprise of Demand Deposit & Time Deposit. It shows a stable trend but showing
high reserve to deposit ratio for 1987-91. There was a really high reserve to deposit ratio in those
four years over the time. But otherwise, the rate was quite a bit stable. The highest amount of
reserve which is Tk 61,642.27 in 2016-17 when the rate was 7% & the lowest in 1971-72. The
average required reserve rate was 6% historically. We can see the lowest reserve ratio in early
2000 & the next 4years. At that period BB decrease the rate to the lowest level. Whenever BB
want to create more money supply, they decrease this rate as we can see during the global financial
crisis in 2007-08 the rate was below average same as for in the last year covid-19 situation as well
which was 4% the lowest in the history.
45
Figure-5: Required Reserve-Deposit Ratio
0.12
0.10
0.08
Ratio
0.06
0.04
0.02
-
1989-90
1971-72
1974-75
1977-78
1980-81
1983-84
1986-87
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
2010-11
2013-14
2016-17
2019-20
Fiscal year
We can see both reserve & deposit are increasing over the period but the ratio is not which shows
that there is bank are creating more bank loan, more money for every taka reserve which is good
for our economy. After the introduction of floating exchange rate, repo, reverse repo and interbank
repo transactions, the control of R/D is somewhat weaker than that of the C/D ratio in money
multiplier, which to be taken to considerable notice to the Bangladesh Bank while designing the
monetary policy.
3. Excess Reserves-Deposit Ratio (E/D)
The excess reserves ratio represents the number of excess reserves a bank with keep for every Tk.1
of deposits it accepts. It is important to remember that this is the amount of reserves a bank keeps
in addition to those that it is required to keep by law (i.e., required reserves). Since a bank keeps
more of the deposits as excess reserves (i.e., excess reserves ratio increases), that means there will
be a smaller pool of resources available to make loans. This will lead to shrinkage of the money
multiplier, which in turn leads to shrinkage of the money supply.
Behavior of Excess Reserve to Deposit Ratio
In view of efficient fund management of the banks, the higher E/D ratio means higher opportunity
cost for the banks. The opportunity cost in terms of the market interest rate is very crucial for fund
management by the banks. Primarily, in order to meet unexpected outflow of deposits and to face
abnormal behavior in the money market, banks keep the excess reserve. This behavior is also
affected by aggregate credit demand which originates from overall economic activities. Since,
46
excess reserve does not earn any interest income, the tendency of the banks would be to minimize
through adopting efficient fund management.
In figure-6, we have shown the e/d ratio of Bangladesh last 49 years where we have taken the data
of Excess Reserve maintained by Schedule Bank with BB divided by Total amount of deposit. The
average E/D ratio is near 2-3% over the time. The tendency of bank to hold excess reserve in last
20 year decrease a lot on average they hold 0-1% o excess reserve. Now bank don’t ideally hold
their reserve in BB because they had a lot of good investment opportunity. During the time of
global financial crisis, the excess reserve hold by schedule bank was close to 0% in those years &
the subsequent years reserve was very insignificant banks was facing problem to maintain the
statutory reserve at that time. Last year during the pandemic in 2020 banks hold the maximum
amount almost Tk 26,000 crores of excess reserve in BB because there was a very little good
investment opportunity out there. Last 49 years banks held average Tk 2700 crores in excess
reserve.
Figure-6: Excess Reserve-Deposit Ratio

0.16
0.14
0.12
0.10
Ratio
0.08
0.06
0.04
0.02
-
1977-78
1980-81
1971-72
1974-75
1983-84
1986-87
1989-90
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
2010-11
2013-14
2016-17
2019-20
Fiscal Year
Now, high E/D ratio is not good for the economy. Bank don’t get any interest on excess reserve.
So holding large amount in excess reserve is not good idea for banks. Low E/D ratio means banks
are providing more loans making more investments, creating more money in the economy. But
excess reserve provide security for the customer to their deposits. Thus e/d ratio maintain negative
relation with money multiplier, e/d increase multiplier decrease & vise versa.
47
Figure-7: Trends in Currency-Deposit, RR-Depsoit, ER-
Deposit Ratio
C/D Ratio RR/D Ratio ER/D Ratio
0.50
0.40
0.30
Ratio
0.20
0.10
-
1977-78
1985-86
1971-72
1973-74
1975-76
1979-80
1981-82
1983-84
1987-88
1989-90
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
2013-14
2015-16
2017-18
2019-20
2011-12
Fiscal Year
In Figure-7, we have summarized all the three ratios (Currency-Deposit, Required Reserve-
Deposit, Excess Reserve-Deposit) last 49 years trend line. As we can see the rr/d & e/d ratio was
quite stable over the year but the currency to deposit ratio was high in the early years after the
independence which has decreased over the recent year because people understand that making
deposit is better than holding currency & deposit rate are also increasing which motivate people to
make more deposit and helping bank to create more loans & making money in the economy which
has a positive effect in the economy overall.
Sources of Money Multiplier
In Table-6, we have shown the sources of money multiplier in details & find out money
multiplier using the equation-5.
𝑪
(𝟏 + 𝑫)
𝒎𝒎 =
((𝑫 ) + ( 𝑫 ) + ( 𝑫 ))
The Table-6 show the data of Currency holding among people which we divide by Total deposit
& get Currency-Deposit Ratio. Then we show the amount of Required Reserve schedule bank must
hold from which we get the Required Reserve-Deposit Ratio. Finally, we show the excess reserve
amount & divide it with deposit to which help us to get Excess Reserve-Deposit Ratio.
48
Figure-8: Money Multiplier
6.0
Multiplier 5.0
4.0
3.0
2.0
1.0
-
1987-88
2013-14
1971-72
1973-74
1975-76
1977-78
1979-80
1981-82
1983-84
1985-86
1989-90
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
2015-16
2017-18
2019-20
2011-12
Fiscal Year
In Figure-8, we have shown the empirical data of Money Multiplier from 1971-72 to 2019-20. The
graph show value in decimals but we have count it on the round figure.
There is a overall upward trend in the money multiplier historically except in some FY 1993-94
which show 3 money multiplier. In that year there was high c/d ratio of .20, rr/d was .06 & e/d was
.10. All of this ratio was the highest in the history that’s why the multiplier faced the lowest value
suddenly. After 2005-06 there was a stable money multiplier 5 which means if monetary base
increase Tk 1 then the money supply will increase Tk 5.
Last Year because of covid-19 panic Currency-Deposit ratio & excess-deposit ratio increases 10%
& 69% respectively but BB liberalized the Required Reserve by decreasing it to almost 27% rate
that’s why the multiplier held constant.
In Figure-9, we have shown the trend in broad money multiplier where we have calculated the multiplier
using this formula:
𝑩𝒓𝒐𝒂𝒅 𝑴𝒐𝒏𝒆𝒚
𝒎𝒎 =
𝑴𝒐𝒏𝒆𝒕𝒂𝒓𝒚 𝑩𝒂𝒔𝒆
To get the Money Multiplier we can divide the Broad Money to the Monetary Base & in this case
we also get the same result what we got in figure-8. The broad money multiplier (mm) showed a
fluctuation trend during 1980-98. The stability of mm is important for conducting monetary policy.
High volatility means money supply is unpredictable.
49
Figure-9: Trend in Broad Money Multiplier
Money Multiplier
6.0
5.0
Multiplier
4.0
3.0
2.0
1.0
-
1987-88
2013-14
1971-72
1973-74
1975-76
1977-78
1979-80
1981-82
1983-84
1985-86
1989-90
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
2015-16
2017-18
2019-20
2011-12
Fiscal Year
The volatility of mm, as measured standard deviation, witnessed a higher trend during the 1980s
and the 1990s relative to 2001-20 period. The movement of mm depends on many factors among
them c/d, rr/d, e/d ratio we have already explained. Others are explained below.
Other Factors Affecting the Money Multiplier
1. Bank Deposit & Advances
An analysis of bank deposits shows that the relatively slower growth rate of deposits can be
attributed to increased consumption and investment expenditure reflecting higher level of
economic activity and lower real interest rate. On the other hand, downward revision of deposit
rate may have some effect on the lower growth rate of time deposit. To understand this from our
historical data, we took Total deposit collected by DMB from Government, Public & Private
Sector (Demand & Time Deposit) & then determine the year-on-year growth rate of deposits. On
the other hand, we took the data of total Advances by DMB to the Public & Private sector.
50
Figure-10: Growth of Deposit & Advance
Growth of Deposit Growth of Advances
50.00%
Growth Rate
40.00%
30.00%
20.00%
10.00%
0.00%
1990-91
1998-99
1974-75
1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1992-93
1994-95
1996-97
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
2018-19
Fiscal Year
In figure-10, we can see the movement of total deposit & advance in the banking system show a
similar pattern over the year except for a few deviations. On average there was a 17.21% total
deposit growth rate & 17.44% total advance growth rate. Number of advances made by DMB was
close to deposits over the year in some FY they make less advances than growth which deposits
they might use in the following year because of lending & deposit rate spread over the year. There
was no major fluctuation in deposit growth except in 1982-85 but there was a high trend of Deposit
among public which decrease over time. Because of the lending rate deviation DMB make very
high advances in some years & very less in some years. In FY 1976-77, 1980-81, 1983-84, 1990-
91, 1991-92, 1999-00, 2000-01, 2001-02, 2003-04, 2006-07, 2011-14, 2019-20 there was a low
growth in advances than deposits by DMB which means they make less advances than the deposits
they have which indicating significant monetary stimulus in those years of low inflation.
2. Bank Deposit & Credit
To understand the relationship between growth of deposits & growth of credit by DMB, we took
Total deposit collected by DMB from Government, Public & Private Sector (Demand & Time
Deposit) & then determine the year-on-year growth rate of deposits. On the other hand, we took
the data of total credit by DMB to the Public & Private sector the sum of total advances &
purchasing of bill by DMB.
In figure-11, we can see the movement of total deposit & advance in the banking system show a
similar pattern over the year except for a few deviations. On average there was a 17.21% total
deposit growth rate & 17.70% total credit growth rate. Number of credits made by DMB was less
compare to deposits over the year exception in some FY occurs when they have more growth in
51
credit than growth of deposits because they might have some good investment opportunity in
purchasing bills in those following year. There was no major fluctuation in deposit growth except
Figure-11: Growth of Deposit & Credit

Growth of Deposit Growth of Credit
50.00%
Growth Rate
40.00%
30.00%
20.00%
10.00%
0.00%
1982-83
1992-93
2002-03
2012-13
1974-75
1976-77
1978-79
1980-81
1984-85
1986-87
1988-89
1990-91
1994-95
1996-97
1998-99
2000-01
2004-05
2006-07
2008-09
2010-11
2014-15
2016-17
2018-19
Fiscal Year
in 1982-85 but there was a high trend of Deposit among public which decrease over time. Because
of the lending rate deviation DMB make very high advances in some years & very less in some
years. In FY 1976-77, 1980-81, 1983-84, 1990-91, 1991-92, 1999-00, 2000-01, 2001-02, 2003-
04, 2006-07, 2011-14, 2019-20 there was a low growth in advances than deposits by DMB which
means they make less advances than the deposits they have which indicating significant monetary
stimulus in those years of low inflation. In FY 1976,78-80,82,85,86,88,89,90,95,96,98 growth of
credit was higher than deposit rest of the year deposit growth was higher. During global financial
crisis in 2007-08, DMB had a 24.47% growth in credit where as 17.63% growth in deposit only.
Same pattern we can see in last year covid situation when the deposit growth rate was 10.61% but
the credit growth rate was high 12.73% now this is not because they made advances more rather
they invest in some bills & public private investment which increase the growth in credit as people
demand for credit increase as well.
3. Bank Lending & Deposit Rate with Inflation (12 Month Average)
In this table we depict the weighted average interest rates of scheduled banks on deposits, advances
& their spread with inflation rate. It is evident from the table that the weighted average interest
rates on deposits and advances declined over the year because of tightened monetary policy by
Central Bank. The lending rate decline to less than 10% in last 4 years. There is a much spread
among the data of lending rate once it was near 13 to 145 & now close to 8 to 9%. But the deposit
rate didn’t decline at that much level. Deposit rate is in between 4 to 7% over the year. As a result,
52
the spread between lending rate & deposit rate showing decreasing trend. Last year, During the
pandemic situation the lending decrease sharply as well as the deposit rate so there was the lowest
2.89% spread in that year. Due to government tightened policy this spread is decreasing & will be
decreased more in near future.
Nominal Nominal Deposit Inflation (12 month

Year Spread
Lending Rate Rate Average)
1 2 3 4 = (2-3) 5
1996-97 13.69 6.67 7.02 3.96
1997-98 14.02 7.07 6.95 8.66
1998-99 14.16 7.28 6.88 7.06
1999-00 13.86 7.21 6.65 2.79
2000-01 13.75 7.03 6.72 1.94
2001-02 13.16 6.74 6.42 2.79
2002-03 12.78 6.29 6.49 4.38
2003-04 11.01 5.65 5.36 5.83
2004-05 10.93 5.62 5.31 6.48
2005-06 12.06 6.68 5.38 7.16
2006-07 12.78 6.85 5.93 7.2
2007-08 12.29 6.95 5.34 9.94
2008-09 11.87 7.01 4.86 6.66
2009-10 11.31 6.01 5.3 7.31
2010-11 12.42 7.27 5.15 8.8
2011-12 13.75 8.15 5.6 10.62
2012-13 13.67 8.54 5.13 6.78
2013-14 13.1 7.79 5.31 7.35
2014-15 11.67 6.8 4.87 6.4
2015-16 10.39 5.54 4.85 5.92
2016-17 9.56 4.84 4.72 5.44
2017-18 9.95 5.5 4.45 5.78
2018-19 9.58 5.43 4.15 5.48
2019-20 7.95 5.06 2.89 5.65
Source: Monthly Economic Trends, Bangladesh Bank
Now, increasing inflation ate with decreasing deposit rate is another problem because it will
discourage to make more deposit by public which will reduce the money supply in the economy
as well. If we look more closely the Inflation rate is almost close to the deposit rate provide by the
DMB which means making deposit is basically protecting money from inflation, this trend is
53
coming out as we can see in last 15 years. If this trend continues people will make lesser amount
of deposit which we have already seen among public & it will cause banks to continue their
operation & reduce money multiplier as well as the money supply.
4. Credit to the Public & Private Sector
In Figure-12 we can see Public & Private sector credit provided by DMB over the period. Here,
initially the private sector credit growth rate was low & public sector growth was high after the
independence, after that FY 2000-01 the private sector credit growth rate was high over public
sector. Now, DMB provide credit to both of this sector but most of the case private sector is
dominating over the public sector according to data. During those period our country’s most of the
private sector was growing as a result credit to those sectors was high on the other hand personal
consumption & expenditure was low at mass level.
Figure-12: Growth of Public & Private Sector Credit

80.00
60.00
Percentage
40.00
20.00
0.00
1976-77
1974-75
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
2018-19
-20.00
-40.00
Fiscal Year
Growth of Publi Sector to Domestic Credit

Growth of Private Sector to Domestic Credit
In FY 2005-06, there was a 34.72% growth rate in public sector before the global financial crisis
when people was taking huge amount of personal loan public loans demand was increased & then
in 2007-08 this growth rate decreased to negative 32.17% which means at that time DMB was not
providing public credit at that level though there was a private credit growth rate at 25.15% at the
same year after the following year the growth rate on credit to public sector was only 6.55%. After
the local market crash in 2009-2010, the following fiscal year 2010-2011 the growth rate of public
sector was negative -5.01% also the private sector growth decrease. Last year, during the covid
54
pandemic the public sector credit increased a lot almost 25% though, as there was no investment
opportunity private sector credit growth decreased to 8.61 in FY 2019-2020.
5. Total Credit to Government (Gross) by Banking System
Bangladesh economy is characterized in poor growth of revenue income which in turns comply
the government to depend on the sources of internal and external borrowings to meet its fiscal
deficit and becoming over burden of debt. Bangladesh economy started with a relatively large
public sector where a majority of large enterprises were nationalized. Those state-owned
enterprises incurred losses were the root of consolidated fiscal deficits.
Figure-13: Govt. Credit from Banking System

600,000.00
Taka in Crores
500,000.00
400,000.00
300,000.00
200,000.00
100,000.00
-
1993-94
1997-98
1973-74
1975-76
1977-78
1979-80
1981-82
1983-84
1985-86
1987-88
1989-90
1991-92
1995-96
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
2013-14
2015-16
2017-18
2019-20
2011-12 Fiscal Year
Credit from BB Credit from DMB Total Govt Credit
Table-12 shows the data about total credit taken by government in last 50 years from the central
bank & DMB. In figure 12 we have plotted those data into graph. As we can see in last 20 years
govt. has taken substantial amount credit from the banking system. One thing is very clear that
govt. has taken a majority of portion of debt from DMB compare to BB. The credit growth rate
was following increasing trend almost every year except in last some 5 years. But in last year due
to covid pandemic govt credit rose almost 37% almost Tk 280,000 crores taka rom the banking
system & DMB alone provide almost Tk 230,000 crores to govt. In last 10 years Government
credit from baking system was average more than Tk 100,000 crores.
Now government has numerous income sources still they take credit from local & foreign
resources. Because there is always budget deficit. To support those budget deficit govt took credit
from the baking system & the amount is increasing. This can be very clear if we look at the
percentage, we have calculated which show how many percentages of GDP Govt. take credit from
55
the banking system. In figure-14, we can see the empirical data. Govt. also need fund to support
the big project which might be funded from the credit of the banking system. This might be the
reason why this credit amount is increasing substantially.
Figure-14: Total Credit to GDP

14.00%
12.00%
Percentage
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
1973-74
1976-77
1979-80
1982-83
1985-86
1988-89
1991-92
1994-95
1997-98
2000-01
2003-04
2006-07
2009-10
2012-13
2015-16
2018-19
Fiscal Year
There is fluctuation but we can definitely say that in last 20 years the portion increased a lot. After
the independence the ratio was also high as at that time govt was dependent on the banking system.
After 2010, the ratio shows a value of 0.10 which means if Our GDP is Tk100 then govt. take Tk.
10 as a credit from the banking system to support the GDP. In recent three years the ratio decreased
but due to pandemic it increases again last year as govt need huge amount of credit to stable the
economy.
Summary
The experience from the analysis of this chapter that the factors of the determinants have a great
impact on money supply as well as on the growth of M2. The ratios C/D, R/D and E/D changed
mm as well as MB result reflected on money supply. Changes of CRR, SLR, Bank rate, interest
rate spread create impact on bank deposit also contribute to change reserve money as well as
money supply. Government borrowing plays an great impact on the inflation which is very volatile
over the years impedes in anticipating M2. Bank credit and advances are not consistent with
deposits. So, the determinants need to be handled more carefully by adopting effective monetary
policy and need its implementation properly by the Bangladesh Bank
56
The Ratios
The behavior of narrow money and broad money growth can be illustrated through the following
ratio analysis.
1. Demand Deposit to Time Deposit Ratio
Figure-15 shows the trends in demand and time deposits. The ratio is indicating a gradually
declining trend over the years except FY 2009-10. The higher growth in time deposits after
1990’s partly reflects the higher opportunity cost of holding money due to attractive returns on
different time deposits, the decline intended to decrease the cost of borrowing and thus to
stimulate the economy.
Fiure-15: Demand to Time Deposit Ratio

1.20
1.00
0.80
Ratio
0.60
0.40
0.20
-
2013-14
1971-72
1974-75
1977-78
1980-81
1983-84
1986-87
1989-90
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
2010-11
2016-17
2019-20
Fiscal Year
Time deposits increased significantly compare to demand deposits which is the reason of declining
in the dd/td ratio in recent 20 years. After the independence amount of demand deposits was near
time deposits at that time deposit rate was high and people’s income was low. Over the time
opportunity cost increase of holding money, inflation rates also increased which in terms result of
lower demand deposits & peoples investment in time deposits. Which has a major impact in broad
money growth as well as the lower ratio between DD/TD.
57
2. Narrow Money(M1) to Broad Money(M2) Ratio
In Table-7, The liquidity performance of the economy, as measured by M1 to M2 ratio which

started to decline till FY 2001-02 and remained almost constant at 0.23, again inclined a little bit
then again remained at the similar pace with little fluctuation at 0.24 to FY 2019-20.
Figure 16: Narrow Money(M1) to Broad

Money(M2) Ratio
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2011-12
The reason for decrease in M1/M2 ratio would be:
▪ Due to a decrease in demand for holding currency or demand deposits, which may be due
to the innovation of ATM, debit and credit cards.
▪ On the other hand, the increase in M1 to M2 ratio appears to be lingering due to an increase
in demand of holding money
▪ Or due to increase in demand deposits as higher inflationary expectations.
3. Broad Money(M2) to GDP Growth
From Table-8 and Figure-17, it is seen that, the Ratio of M2 to GDP Growth of 1972-2020. We
can see an upward trend in the ratio, that can be used as proof of over-issuance of money. GDP
measures the production that takes place within the country’s borders.
58
While on the other hand, M2 usually includes currency in circulation, demand deposits and most
savings accounts. Therefore, intuitively, this ratio measures the proportion of transactions
facilitated by M2 as medium of payment.
Figure 17: Broad Money(M2) to GDP Ratio

60%
50%
40%
30%
20%
10%
0%
1971-72
1974-75
1977-78
1980-81
1983-84
1986-87
1989-90
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
2010-11
2013-14
2016-17
2019-20
In the year 1971-72, GDP was BDT 4,405.10 crore, which increased to BDT 6,897.70 crore in the
next year. And the amount of Money Supply, M2 was BDT 699.21 crore, which increased BDT
989.11 crore. And the M2 to GDP Ratio declined by 2%.
This ratio experienced a fluctuation up to 1982-83. Then it started to have an upward pattern 1983-
84. From 1987-88, a slight fluctuation is seen, but it did not last too long, and started growing from
1991-92 to 2015-16 with a ratio of 53%. In the year, 2016-17, it decreased by 2%. And finally the
M2 to GDP ratio in 2019-20 Is seen to be 49%. However, in the last 50 years, the ratio experienced
a growth of about 33%.
The higher M2/GDP ratio from 16% to 49% in the last 50 years depicts that, businesses get
financing mainly from bank lending and residents’ assets are predominantly deposits hence more
money supply resulting from money creation process within the banking system.
59
Figure-18: Growth of M2 & GDP
50.00
40.00
30.00
20.00
10.00
-
1984-85
2000-01
2016-17
1972-73
1974-75
1976-77
1978-79
1980-81
1982-83
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2018-19
(10.00)
GDP Growth M2 Growth
Figure-18 shows the growth rate of GDP & M2 from 1971-72 to 2019-20. GDP growth rate is
stable over the year except in 1974-75 it goes negative might be the after-independence effect. At
that year M2 growth rate was also very low. M2 growth rate is comparatively high than GDP
growth rate as GDP include a lot of many factors whereas Broad money include part of those
factors like currency & deposits. In last FY 2019-2020 both of this broad money & GDP growth
rate decrease due to pandemic.
4. Bangladesh Income Velocity of Inflation, with GDP Growth & M2

Growth Rate
The basic framework for estimating the demand for money is the quantity theory of money. It
assumes a direct link between the stock of money (M2) and the general level of economic activity,
as represented by nominal GDP. This relationship is captured in the following equation with a
coefficient called the income velocity of money, v:
𝑴𝟐 × 𝑽 = 𝑷 × 𝒀
Here,
M2 = The stock of broad money
V =Velocity of circulation
P = Consumer Price index and
Y = real GDP
60
Figure 19: Broad Money, GDP,Inflation &
Income Velocity of Money
25.00
20.00
15.00
10.00
5.00
0.00
2002-03
2015-16
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2012-13
2013-14
2014-15
2016-17
2017-18
2018-19
2019-20
2011-12
Broad Money GDP Growth
Income Velocity Of Money Inflation
Therefore, 𝑽 = (𝑷 × 𝒀)⁄𝑴𝟐 this implies that the income velocity of money is equal to nominal
GDP divided by broad money. For Bangladesh income velocity of money has been calculated on
the basis of nominal GDP divided by the broad money at the end of the year.
The income velocity of money declined from 3.60 of FY 1996 to 2.04 in FY 2020 (Table -9).
Income velocity of money was on a declining trend over the past several years indicating increased
deepening in the economy. Movements of GDP and M2 growth, inflation and income velocity of
money during FY 1996 to FY 2020 are shown in the figure 19.
As we can see from the graph that Income velocity of money is quite stable & lowest
among the other three variables.
Summary
Like any other country, Bangladesh Bank regulates the money supply by its different operating
instruments. BB tries to keep its balance sheet sound, but the elements of the balance sheet of BB
fluctuating, whose impact goes on money supply. The behavior of M1and M2 indicates that they
are fluctuating due to changes of NFA, NDA, RM and GDP as well as inflation to target M1 and
M2. Also, deposits are not in order for all time Contribution of the sources of money supply are
inconsistent in the system. BB needs to take more effective measure to regulate its operating
instruments.
61
Regression Analysis
Based on the review of the literature, we have created a regression model based on different
variable. Specify real (inflation-adjusted) money supply (MSR) to depend on Monetary Base (MB)
consist of Currency outside of bank & reserve by DMB & other NBFI, GDP at current market
price, Foreign Resources (FR) includes Foreign Remittance also with the foreign aid & loans,
Inflation Rate (IR) based on CPI of 12 months average, Total Number of Bank Branches (TNBB)
include scheduled & Non-Scheduled bank, Reserve (R) which is the sum of Cash & Excess
Reserve of maintained by Scheduled bank with Bangladesh Bank, Net Domestic Asset (NDA)
comprise of domestic credit with others domestic asset, Time Deposit (TD). We have built this
model based on FY 1996-97 to 2019-20 data.
For the period of 1996-97 to 2019-20, MSR = MB + GDP + FR + IR + TNBB + R + NDA
Since money supply can be measured as narrow money (M1) as well as broad money M2, we
rewrite equation (2) to have the following two versions, one for M1R and the other one for M2R
with the same explanatory variables including Time Deposit (TD):
𝑴𝟏𝑹 = 𝒂 + 𝒃 𝑴𝑩 + 𝒄 𝑮𝑫𝑷 + 𝒅 𝑭𝑹 + 𝒆 𝑰𝑹 + 𝒇 𝑻𝑵𝑩𝑩 + 𝒈 𝑹 + 𝒉 𝑵𝑫𝑨 … … … . . (𝟏)
𝑴𝟐𝑹 = 𝒂 + 𝒃 𝑴𝑩 + 𝒄 𝑮𝑫𝑷 + 𝒅 𝑭𝑹 + 𝒆 𝑰𝑹 + 𝒇 𝑻𝑵𝑩𝑩 + 𝒈 𝑹 + 𝒉 𝑵𝑫𝑨 + 𝒊 𝑻𝑫 … … … . . (𝟐)
The Expected signs of the coefficients are: 𝒃 > 𝟎, 𝒄 > 𝟎, 𝒅 > 𝟎, 𝒆 > 𝟎, 𝒇 > 𝟎, 𝒈 < 𝟎, 𝒉 > 𝟎, 𝒊 > 𝟎
The money supply process primarily depends on monetary base, which is expected to have a
positive impact on money supply (b > 0). High-powered money equals currency in circulation
including Bangladesh Bank notes and government notes and coins plus statutory reserve balances
with Bangladesh Bank. It is treated in the liabilities side of the Bangladesh Bank. According to the
monetarist perspective, when MB rises, and other things remain the same, the money supply is
expected to rise. The volume of MB is determined by the behavior of Bangladesh Bank, the central
bank of the country. GDP is expected to have a positive impact on the Money Supply as economic
activity increases over the time it will bring positive impact but is not directly have a significant
impact on Money Supply. Foreign reserve is the amount of foreign currency stored in the banking
system might be from the foreign remittance & foreign loans. Which will increase the money
supply. Inflation rate always have a very significant impact on the money supply at least in the
short term. TNBB means branch of bank which facilitate the banking system to the root level
people so it should also have positive impact. Now reserves means how much money are ideally
sit in the Bangladesh Bank so it will hamper the money creation or deposit creation in the economy
so it will reduce the money supply when the reserve values increased. NDA is the net domestic
62
asset which mostly comprised of domestic credit as domestic credit demand increased the supply
of money should be proportionately increased. The last variable is the Time Deposit which is
majority portion of broad money so it had a very significant positive relation with M2. As we have
made this model based on big time series data & money supply can be affected by so many other
things in real life, there might be some deviation or unusual data results from this regression. This
is just to show the data we have collected of different variables with the money supply in the short
run & long run money supply.
Money Supply (M1R)
From Table 10.1: Regression Model for Narrow Money Supply M1, we have the Regression
Equation (M1R):
= 36999.21341 + 1.31590 MB + 0.00132 GDP + 0.01813 FR + 119.08527 IR - 3.84508 TNBB -

0.97260 R + 0.03537 NDA
As shown in the above equation, money supply, M1 is strongly determined by the amount of
Monetary Base. Figure 20 shows a strong positive relationship between the MB with the narrow
money M1 in Bangladesh as shown by their common upward movement over time.
Figure 20: Regression Line for M1

1,600,000.00 M1R = 36999.21341 + 1.31590 MB + 0.00132 GDP + 0.01813 FR +
119.08527 IR - 3.84508 TNBB - 0.97260 R + 0.03537 NDA
1,400,000.00
1,200,000.00 R Square = 0.99978
1,000,000.00
800,000.00
600,000.00
400,000.00
200,000.00
-
- 5.00 10.00 15.00 20.00 25.00 30.00
(200,000.00)
(400,000.00)
63
The R2 and adjusted R2 values are quite high and the F-value also shows that the overall regression
is statistically significant. However, in terms of individual variables, only the Monetary Base is
statistically significant, the rest of the variables were not statistically significant.
Table 10.1 gives the correlation coefficient of different variables in the model. A look at the
correlation coefficients among the explanatory variables reveals that a few explanatory variables
have high correlation with some other explanatory variables. For example, M1 is positively
correlated to GDP but the correlation is relatively very low as GDP fully not determined the values
of money supply in the short run also GDP includes so many others factor, foreign resources are
showing relatively high correlation compare to GDP, Whenever the foreign remittance enter the
economy, it has an influence in the supply of narrow money which we can see in the equation.
Inflation Rate are positively related with money supply & it has more severe impact than any other
variable but the coefficient value is much bigger might be the reason is multilinearity problem.
NDA has a positive coefficient with narrow money as net domestic asset particularly domestic
credit increase means increase in the demand of credit which influence in the money supply.
Negative coefficients are reflected in R and TNBB. Reserve means the amount of deposit DMB
held in BB as cash & excess reserve. This amount didn’t play any role in the money creation or
providing loan process. That’s why whenever central bank increases the SLR & CRR rate it effects
the money supply negatively. Here we can also see in the equation that an increase in reserve
effecting money supply negatively. The negative but marginally significant coefficient of TNBB
is somewhat surprising. The anomalies observed for these variables may be attributed at least
partially to the presence of multicollinearity among some explanatory variables. It is to be noted
here that due to the multicollinearity problem, one needs to be careful with the interpretation of
the coefficients of all the variables reported in this table, not only for the variables which show
statistical anomaly.
Money Supply (M2R)
From Table 11.1: Regression Model for Narrow Money Supply M1, we have the Regression
Equation (M2R):
= − 1565.72523 + 𝟏. 𝟑𝟑𝟗𝟔𝟓 MB + 𝟎. 𝟎𝟎𝟗𝟏𝟕 GDP + 𝟎. 𝟎𝟑𝟖𝟐𝟐 FR + 𝟗𝟒. 𝟎𝟑𝟕𝟏𝟗 IR

+ 𝟎. 𝟏𝟖𝟏𝟗𝟗 TNBB − 𝟎. 𝟗𝟗𝟎𝟓𝟔 R + 𝟎. 𝟎𝟓𝟎𝟕 NDA + 𝟎. 𝟗𝟑𝟓𝟕𝟗 TD
Like M1, M2 is also positively correlated to the amount of Monetary Base. Table 11.1 gives the
correlation coefficient of different variables in the model. A look at the correlation coefficients
among the explanatory variables reveals that a few explanatory variables have high correlation
64
with some other explanatory variables. For example, M2 is positively correlated to MB, GDP, FR,
IR, TNBB, TD and NDA. And negatively coefficients are reflected in R.
Figure 21: Regression Line for M2

1,600,000.00 M2R = - 1565.72523 + 1.33965 MB + 0.00917 GDP + 0.03822 FR +
1,400,000.00 94.03719 IR + 0.18199 TNBB - 0.99056 R + 0.0507 NDA + 0.93579 TD
1,200,000.00 R Square = 0.99998

1,000,000.00
800,000.00
600,000.00
400,000.00
200,000.00
-
- 5.00 10.00 15.00 20.00 25.00 30.00
(200,000.00)
(400,000.00)
Table 11.1 gives the correlation coefficient of different variables in the model. A look at the
correlation coefficients among the explanatory variables reveals that a few explanatory variables
have high correlation with some other explanatory variables. For example, M2 is positively
correlated to GDP but the correlation is relatively very low as GDP fully not determined the values
of money supply in the short run also GDP includes so many others factor, foreign resources are
showing relatively high correlation compare to GDP, Whenever the foreign remittance enter the
economy, it has an influence in the supply of narrow money which we can see in the equation.
Inflation Rate are positively related with money supply & it has more severe impact than any other
variable but the coefficient value is much bigger might be the reason is multilinearity problem.
NDA has a positive coefficient with narrow money as net domestic asset particularly domestic
credit increase means increase in the demand of credit which influence in the money supply.
Negative coefficients are reflected in R and TNBB. Reserve means the amount of deposit DMB
held in BB as cash & excess reserve. This amount didn’t play any role in the money creation or
providing loan process. That’s why whenever central bank increases the SLR & CRR rate it effects
the money supply negatively. Here we can also see in the equation that an increase in reserve
effecting money supply negatively. The TNBB in the long term positively related in the growth of
broad money as Number of Bank Branches increases it will help to spread money supply in the
country. Time Deposit is the major component in the broad money as a result in the regression
model it has a positive coefficient for the money supply M2.
65
Summary of M1R & M2R
In terms of Monetary base as a coefficient, 1.32 for M1R & 1.34 for M2R, which means MB has
more impact in the broad money supply. GDP shows 0.00132 for M1R & 0.00917 for M2R, both
of this show weak correlation with money supply but GDP has slightly more positive relation with
broad money supply. Foreign resources show 0.018 for M1R & 0.038 for M2R, this shows slightly
more positive influence on money supply & we can say FR has more influenced in broad money
supply. In these three variables one thing is common it has more influenced on broad money supply
the reason might be all of these three variables take time to show their results. Their impacts reflect
in the long term clearly compare to in the short term. As a result, these has more influenced in the
broad money supply.
Now, inflation rate is something which makes the money supply changes in vast size. We all know
If inflation goes up money supply goes up, vice versa this proves true in our regression model as
well. But our finding is inflation impact more in then narrow money supply compare to broad
money supply.
Total Number of Bank Branches always should increase in the banking system activity but it takes
time to impact the system of newly open branch as a result we can see the impact of TNBB in the
Broad money supply only.
Reserve decreases narrow as well as broad money supply as reserve goes increase the possibility
of making more time deposit long term investment is slightly difficult for which it has slightly
more negative impact on broad money supply.
NDA is positive coefficient for broad money & narrow money but slightly more influenced in the
broad money. In the M2R time deposit coefficient influence is more than GDP, FR, NDA.
We can conclude from this two-regression model that, Monetary base, Inflation rate, Demand
Deposit Rate, Cash Reserve Requirement, Statutory Reserve Requirement, Time Deposit Rate,
Foreign Remittance plays the most vital role in narrow money & broad money supply.
66
Chapter 05: Conclusion
Findings
In the whole Term Paper, we have tried to analyze the Data of Narrow Money & Broad Money
Supply & it’ components, major sources, determinants, sources & component of those sources,
amazing data with different Ratios for the empirical data of FY 1971-72 to 2019-20. From the data
we can say, for controlling the money supply at a reasonable position Bangladesh Bank trying to
use all their direct and indirect instruments and open market operation tools to achieve their policy
objective through their different operating and intermediate targets. Previous chapters of this paper
unveil some findings based on the analysis of the available data regarding money supply in
Bangladesh. Here we have summarized those findings & draw a conclusion based on it.
Historically we have found that Broad Money Supply Growth Rate was 2% on an average higher
than Narrow Money Supply in Bangladesh except in weak economic year or any crisis, demand
for currency increase which increase the M1 growth slow down the time deposit & decrease in M2
growth. It is to be accentuated that the growth of M1 and M2 depends on the three factors currency
outside banks, deposits, and inflation. It is clear that recently currency outside bank and demand
deposits have been increased at a slower rate while the time deposits increased at a much higher
growth rate.
The Sources of Money Supply reflect a fluctuation in the NFA but a constant positive growth in
NDA which is the major portion of Money Supply also. Among the net domestic credit, majority
of the portion was provided by country’s DMBs to the Private Sector. The NFA has become stable
in recent times because of our Foreign Reserves are increasing major reason might be Foreign
Remittance.
Major determinants of Money Supply are the Monetary Base which shows fluctuating growth rate.
Major fluctuation occurs before FY 2000 but after that we can also see some fluctuations. As
Monetary Base is dependent on the reserve & currency, whenever there is a change in reserve by
DMB with BB we saw fluctuations in the growth of Monetary base, issuing currency might be
another factor of fluctuation.
Money Multiplier is another important determinant which comprise a lot of other determinants
that determine what will be the money supply. A lower multiplier means lower money supply &
higher multiplier means higher money supply. c/d, e/d & rr has major impact on multiplier. c/d
indicating a initially higher than declining trend & in recent time maintain a stable ratio. The reason
might be people are holding less currency & making more deposit. RR ratio was stable historically
except in 1990’s some increment. e/d show fluctuating results. All of these make positive impact
on the multiplier by having upward trend in our money multiplier which also make impact in the
money supply.
There are some other factors. Like Bank deposit to advance & credit. DMB make more advances
& credit compare to their deposits but there are also some exceptions in some FY. But the gap
67
between deposit & advances are not that much huge almost close to each other which indicating
monetary stimulus. Bank lending & deposit rate spread was high at initial time. With the increase
of inflation rate & regulations this spread has become very low. We can see major decrease in
lending rate. Credit to the private sector was always high compare to public sector credit provided
by DMB. In the year of financial crisis or weak economy public sector credit become higher.
Government credit from Banking system shows, When the economy was facing problem govt.
Credit growth also increased compare to the normal times. Historically BB provides more credit
to govt. than DMB. But in last 10year govt. is heavily dependent on the DMB credit. The difference
between BB & DMB credit is becoming huge. It means govt. is heavily using the fund of DMB to
support the economic activity as well as the country’s development project. After 2010-11
Bangladesh Bank decrease credit amount to government. Converting the amount in terms of our
GDP percentage it increasing every year. Government borrowing amount from domestic banking
system close to 10% of GDP at recent times.
Demand deposit to Time Deposit Ratio show a declining trend which reflect that the amount of
time deposit is increasing demand deposit are not might be a lower deposit rate, inflation increases
opportunity cost. The affect can be seen in Narrow money to Broad Money ratio where we have
seen declining rate at the starting then stable for some period again decline now a quite stable like
DD/TD ratio. The higher M2/GDP ratio from 16% to 49% in the last 50 years depicts that,
businesses get financing mainly from bank lending and residents’ assets are predominantly
deposits hence more money supply resulting from money creation process within the banking
system. As broad money increasing proportionately with GDP our income velocity as a result
decrease over the period 3.60 to 2.04.
At the end of this term paper to make sure the data we have founds, the trends it indicating also
support statistical calculation & with our theoretical knowledge of Economics, we have made a
regression model for money supply with different variables which are the determinants of money
supply. Because of multicollinearity problem some data shows abnormal results. Overall Monetary
base, Inflation Rate show strong positive relation with M1 & M2 money supply. Other hand
required reserve show strong negative relation, GDP, Foreign Resources, TNBB, NDA shows
positive relation also with M1 & M2 supply in Bangladesh Economy.
Recommendation
Government Borrowing from BB

Government borrowing from banking system should decreased specially from Bangladesh bank.
It is the domestic financing part that is at once costly, crowds out private investment, and could
fuel inflation if sourced excessively through government borrowing from the Bangladesh Bank.
So, BB may take it in a strong consideration and make the government to understand to find out
options to create enhancement of internal resources other than borrowing from banking system.
68
Rationalizing the Interest Rate
Rationalizing interest rate might be a good option for Bangladesh economy. Though Bangladesh
Bank is going at that initiative. Spread in interest rate was high in BD though it declines in recent
times & it should be maintained at this level.
Private Credit and Investment
To keep credit flow to the private sector at the current rate while meeting additional demands from
government will surely bust BB's target for both money supply and credit growth. On the other
hand, credit restraint, which is the outcome of tighter monetary policy, cannot be popular with the
business community. A liberal monetary policy is with easy availability of credit, more investment
and further growth. So, government and BB may adopt flexible credit scheme for private sector to
flourish.
Targeting Broad Money Supply
The simple rule of monetary accommodation would require our money supply (broad money, M2)
to grow at a rate equal to the sum of projected GDP growth and its deflator (a broader measure of
economy-wide price inflation). Bangladesh Bank necessarily be more cautious and be carefully
calculate the consequences. Because depending on these two main factors money supply is largely
dependent. We should focus on our broad money supply, it’s movements sources fluctuations. It’s
really important that our broad money equally grow with GDP & it’s deflator which is Price
inflation.
Conclusion
The recent Global Pandemic of Covid-19 create some negative impact on our economy overall
which makes a negative impact on banking system business & almost in very sector. One good
thing is the increase in foreign reserve by foreign remittance but foreign investment declined,
domestic capital mobilization may be interrupted that may affect the RM as well as money supply
in Bangladesh. In the meantime, government has declared financial package to recover the
financial sector and the foreign exchange earnings sectors, business to recover their capital &
trying to make economy like it was before. All these efforts will help to keep the GDP growth as
intended and Bangladesh Bank will be able to control the inflation and be able to keep steady
growth rate of broad money and sustainable growth of the economy.
69
References
Annual Report (various issues), Bangladesh Bank.

Monthly Economic Trends (various issues), Bangladesh Bank.
Monetary Policy Review (MPR), Bangladesh Bank.
Bangladesh Bank Quarterly (Various issues), Bangladesh Bank.
Bangladesh Bank Bulletin (Various issues), Bangladesh Bank.
Quarterly Scheduled Banks Statistics (Various issues), Bangladesh Bank.
Bangladesh Economic Review (Various Issues), Ministry of Finance, Government of Bangladesh.
Websites:
• www.bangladeshbank.org.bd.
• www.mof.gov.bd.
• www.bbs.gov.bd.
70

Group 06 Section C ME Term Paper

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Group 06 Section C ME Term Paper

Uploaded by

Copyright:

Available Formats

Determinants of Money

24-043 Md. Jahangir

24-046 Mustafizur Rahman

24-059 Suhala Tahsin

24-063 Ifrat Khan

24-143 Rifa Rafia

Date of Submission: 30th May, 2021

30th May, 2021

DR. Muhammad Saifuddin Khan

Subject: Submission of Term Paper on “Determinant’s of Money Supply in Bangladesh”

Chapter 1: Introduction ............................................................................................................................. 4

Currency in Circulation Deposits

1971-72 211.21 35.61 175.60 217.18 306.43 523.61 699.21

1972-73 305.39 18.96 286.43 290.60 412.08 702.68 989.11

1973-74 352.20 21.10 331.10 414.00 499.20 913.20 1,244.50

1974-75 316.80 26.60 290.20 508.90 460.40 969.30 1,259.60

1975-76 364.20 34.30 329.90 552.20 514.70 1,066.90 1,396.90

1976-77 421.80 65.50 356.30 616.40 767.00 1,383.40 1,739.90

1977-78 570.70 66.40 504.30 719.50 916.90 1,636.40 2,141.10

1978-79 693.30 80.00 613.30 911.40 1,235.20 2,146.60 2,760.00

1979-80 796.60 103.20 693.40 1,038.20 1,513.20 2,551.40 3,245.00

1980-81 1,005.00 126.20 878.80 1,071.30 2,149.70 3,221.00 4,100.00

1981-82 1,013.10 135.60 877.50 1,134.50 2,536.60 3,671.10 4,548.70

1982-83 1,285.10 146.50 1,138.60 1,495.00 3,263.90 4,758.90 5,898.20

1983-84 1,791.80 235.50 1,556.30 1,993.40 4,835.90 6,829.30 8,385.80

1984-85 1,998.60 275.70 1,722.90 2,508.70 6,302.40 8,811.10 10,534.20

1985-86 2,291.50 338.40 1,953.10 2,974.30 7,410.20 10,384.50 12,338.10

1986-87 2,436.90 362.00 2,074.90 3,186.30 9,090.30 12,276.60 14,353.10

1988-89 3,048.10 432.50 2,615.60 2,845.10 13,617.40 16,462.50 19,078.10

1989-90 3,694.30 506.00 3,188.30 3,180.40 15,928.90 19,109.30 22,297.60

1990-91 4,235.70 623.90 3,611.80 3,591.90 17,800.70 21,392.60 25,004.40

1991-92 4,671.30 598.70 4,072.60 4,184.60 20,268.70 24,453.30 28,525.90

1992-93 5,019.00 538.90 4,480.10 4,582.50 22,473.00 27,055.50 31,535.60

1993-94 6,107.50 691.50 5,416.00 5,751.10 25,235.90 30,987.00 36,403.00

1994-95 7,188.50 623.40 6,565.10 6,614.30 29,032.90 35,647.20 42,212.30

1995-96 7,899.30 776.00 7,123.30 7,336.10 31,231.10 38,567.20 45,690.50

1996-97 8,454.70 880.10 7,574.60 7,592.40 35,460.30 43,052.70 50,627.30

1997-98 9,076.6 923.3 8,153.3 7,735.2 39,980.5 47,715.7 55,869.0

1998-99 9,713.5 1,026.9 8,686.6 8,562.8 45,777.3 54,340.1 63,026.7

1999-00 11,264.4 1,088.4 10,176.0 9,705.3 54,881.1 64,586.4 74,762.4

2000-01 12,832.8 1,354.5 11,478.3 10,869.1 64826.8 75,695.9 87,174.1

2001-02 13,880.2 1,348.8 12,531.4 11,620.4 74,454.9 86,075.3 98,616.0

2002-03 15,342.3 1,440.5 13,901.6 12,827.9 87,251.1 100,079.0 113,994.3

2003-04 17,287.4 1,476.4 15,811.0 14,612.6 99,273.7 113,886.3 129,721.7

2004-05 20,327.9 1,809.8 18,518.1 16,849.9 116,042.3 132,892.2 151,446.4

2005-06 24,894.1 2,032.0 22,862.1 19,739.6 138,021.9 157,761.5 180,674.2

2006-07 28,787.4 2,143.6 26,643.8 23,462.5 161,336.2 184,798.7 211,504.2

2007-08 35,648.5 2,958.6 32,689.9 26,517.6 189,480.5 215,998.1 248,794.9

2008-09 39,448.7 3,399.5 36,049.2 30,236.5 230,073.0 260,309.5 296,499.9

2009-10 50,465.4 4,308.3 46,157.1 41,621.8 275,042.8 316,664.6 363,031.1

2010-11 60,526.9 5,731.8 54,795.1 48,106.2 337,418.9 385,525.1 440,520.0

2011-12 64,896.5 6,479.4 58,417.1 51,060.4 407,388.1 458,448.5 517,109.5

2012-13 75,372.3 7,819.4 67,552.9 55,736.5 479,902.3 535,638.8 603,505.4

2014-15 98,153.9 10,213.1 87,940.8 72,383.8 626,799.9 699,183.7 787,613.7

2015-16 132,305.2 10,230.7 122,074.5 89,759.1 703,947.2 793,706.3 916,377.9

2016-17 151,265.2 13,733.4 137,531.8 101,885.2 775,997.6 877,882.8 1,016,076.1

2017-18 154,940.5 14,023.0 140,917.5 113,217.1 855,087.3 968,304.4 1,109,981.0

2018-19 170,387.1 16,100.1 154,287.0 118,217.9 946,318.1 1,064,536.0 1,219,611.5

2019-20 208,094.1 15,979.6 192,114.5 135,528.4 1,045,471.1 1,180,999.5 1,373,735.0

Source: Bangladesh Bank, Statistical Department

Table-2: Broad Money Supply & It’s Sources

1974-75 105 74 460 167 32 556 289 (423) 1,081 1,260

1975-76 (89) 74 580 142 31 659 346 (345) 1,412 1,397

1976-77 62 50 473 259 31 706 516 (356) 1,627 1,740