Liquidity Dynamics in Bangladesh: Investigating the Impact of Selected Macroeconomic Indicators Using an ARDL-ECM Method

Abstract

The study scrutinizes the influence of the selective macroeconomic forces on the liquidity of Bangladesh. The ratio of excess reserve and total deposit liability is used to represent the liquidity of Bangladesh while total domestic credit, lending rate, consumer price index (CPI), excess reserve and exchange rate are selected as the macroeconomic forces. Using yearly data from 1986 to 2021, different time-series techniques have been used. Cointegration test explicates no cointegrating relationship among the variables. It has been found that 58% of the variation of liquidity is explained by the variation of liquidity itself 20% by domestic credit, 19% by consumer price index and another 12% by the other variables like excess reserve, exchange rate and lending rate. From the result of VAR lag order selection criteria, the maximum lag of the series is one. VAR model suggests the stability and no autocorrelation among the variables. From granger causality test, it can be inferred that domestic credit can forecast consumer price index, consumer price index can cause excess reserve of the country, consumer price index can forecast lending rate, domestic credit can cause increase or decrease the liquidity of the country, liquidity can granger cause excess reserve and excess reserve can cause any changes in liquidity. Lastly, excess reserve can predict lending rate. This results will help the policy makers to predict the liquidity trends and the impact of some selected macroeconomic variables contributing to predict the liquidity.