1 Asian Review, Journal of Asian University of Bangladesh ISSN: 1729-5122, Volume: 4, Number: 1, 2015 Causal Links between Money, Price, and Output in Bangladesh: A Cointegration and VECM Approach Bikash Chandra Ghosh* Md. Khairul Islam** Md. Elias Hossain** Abstract The present study is an effort to investigate the relationship among money, price and output for Bangladesh over the period 1974 to 2012. The estimated results of vector error correction model based on VAR indicate the existence of long-run bidirectional causality between money supply and output, and unidirectional causality from price level to money supply and output. However, in the short-run, the bidirectional causality is found between money supply and price level, and unidirectional causality is found from output to price level. The results suggest that money supply is responsible for increasing price level and thereby inflation is a short-run monetary experience. Introduction Bangladesh is a least developed country in the world. It suffers from imperfection in both money and good markets (Ali and Islam, 2010). Despite the existence of imperfection in markets, the economy of the country has grown by around 5.7% per year on average since 1996 (ADB, 2003). However, to keep the growth rate stable, price stability is necessary. Bangladesh Bank, the central bank of Bangladesh, seeks to achieve price stability through the management of money supply and it uses half-yearly monetary policy to guide economic growth by controlling gradual increase in general price level and stabilizing currency. Again, the Bank influences reserve money through indirect market based instruments such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), repo, reverse repo, open market operations, and moral suasion (Alam, 2014, Islam 2008). To conduct monetary policy, the Bank targets the broad money (M2) as an intermediate instrument. The supply of M 2 money in the country has increased over the time. It was Tk. 63027.10 crore in fiscal year 1998-99 and increased to Tk. 546028.44 crore in the fiscal year 2012-13 (Bangladesh Bank, 2014). However, an increase in money supply increases the general price level or inflation. * Lecturer, Department of Economics, Pabna University of Science & Technology, Pabna-6600. email:bikasheco_pust@ymail.com ** Lecturer, Department of Economics, Rajshahi University, Rajshahi 6205, Bangladesh; email: khairul06eco@gmail.com *** Professor, Department of Economics, Rajshahi University, Rajshahi 6205; Bangladesh; email: eliaseco@ru.ac.bd