DOI: 10.36347/sjebm.2014.v01i08.005

Pages: 377-381

The study aims at analyzing the behavior of the real narrow money demand function (M1) for Bahrain based on annual data for the period (1991-2013), by adopting Cointegration, Error Correction Model and Granger Causality techniques. The main findings show that the demand function for real money is stable in the long run; in addition, there is a cointegration between real money demand, real income and inflation rate during the study period. The study concludes that Central Bank of Bahrain could effectively use the supply of money as an instrument of monetary policy in order to achieve price stability and promote economic growth.