Istituto di Economia Internazionale - Monetary Policy Transmission over the Real Sector of Bangladesh Economy: An SVAR Approach

Recent Articles

Read more about our latest published articles.

Review’s Archive

Corresponding Author:
Abdur Rahman Forhad, Northern Illinois University, DeKalb, Illinois, USA

Coauthors:
Ghassem A. Homaifar, Middle Tennessee State University, Murfreesboro, Tennessee, USA
Abul Hasnat Muhammed Salimullah, Middle Tennessee State University, Murfreesboro, Tennessee, USA

Monetary Policy Transmission over the Real Sector of Bangladesh Economy: An SVAR Approach

Volume 70 - Issue 1, February 2017
(pp. 25-46)
JEL classification: E40, E50
Keywords: Bangladesh, Monetary Policy, SVAR

Abstract

This study examines the effectiveness of the monetary policy transmission of Bangladesh using Structural Vector Autoregressive model (SVAR) for the period of 1972-2014. The SVAR model investigates how a monetary policy shock defined as an unexpected rise in interest rate affects real and nominal macro variables; namely real output, prices, real effective exchange rates, and money supply. Our results suggest that a monetary policy shock does have a short run effect on real output, price level, and exchange rates. A monetary policy shock generates inflationary pressure leading to a devaluation of the Bangladeshi Taka. This paper suggests that the policy makers, to consider the trade-off between output and interest rate of Bangladesh.

Read the full article

Download the article in PDF format to read and print.

Bibliography

Adrian, T. and H.S. Shin (2010), “Financial Intermediaries and Monetary Economics”, Federal Reserve Bank of New York Staff Report 398.
Ahmed, M.K., M. Akhtaruzzaman and S. Barua (2006), “Effects of Monetary Policy on Price Formation of Financial Assets: A Test for Bangladesh”, Technical Report Working Paper Series No. WP 0703, Policy Analysis Unit, Research Department, Bangladesh Bank.
Ahmed, S. and M.E. Islam (2004), “The Monetary Transmission Mechanism in Bangladesh: Bank Lending and Exchange Rate Channels”, The Bangladesh Development Studies, 30(3-4), 31-87.
Alam, M.R. (2015), “The Effectiveness of Monetary Policy in Bangladesh”, The Journal of Developing Areas, 49(2), 363-372.
Andersen, L.C. and J.L. Jordan (1968), “Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilization”, Federal Reserve Bank of St. Louis Review, November, 11-24.
Andries, A. (2012), “Monetary Policy Transmission Mechanism onto the Real Economy a Literature Review”, The USV Annals of Economics and Public Administration, 12, 1(15), 211-217.
Bagliano, F.C. and C.A. Favero (1998), “Measuring Monetary Policy with VAR Models: An Evaluation”, European Economic Review, 42(6), 1069-1112.
Bech, M.L., L. Gambacorta and E. Kharroubi (2014), “Monetary Policy in a Downturn: Are Financial Crises Special?”, International Finance, 17(1), 99-119.
Belke, A. and J. Klose (2011), “Does the ECB Rely on a Taylor Rule During the Financial Crisis? Comparing Ex-Post and Real-Time Data with Real-Time Forecasts”, Economic Analysis and Policy, 41(2), 147-171.
Bernanke, B.S. and M. Gertler (1995), “Inside the Black box: The Credit Channel of Monetary Policy Transmission”, The Journal of Economic Perspectives, 9(4), 27-48.
Bernstein, M.A. and M.A. Bernstein (1989), “The Great Depression: Delayed Recovery and Economic Change in America, 1929-1939”, Cambridge University Press: Cambridge, MA.
Blanchard, O.J. (1989), “A Traditional Interpretation of Macroeconomic Fluctuations”, The American Economic Review, 79(5), 1146-1164.
Blanchard, O.J. and M.W. Watson (1986), Are Business Cycles All Alike?, in: R. Gordon, “The American Business Cycle: Continuity and Change”, The University of Chicago Press: Chicago, IL.
Blinder, A.S. and R.M. Solow (1974), Analytical Foundations of Fiscal Policy, in: A.S. Blinder, R.M. Solow (Eds), “The Economics of Public Finance: Essays”, Brookings Institutions: Washington, DC.
Bryan, M.F. and S.G. Cecchetti (1994), Measuring Core Inflation, in: G. Mankiw (Ed.), “Monetary Policy”, The University of Chicago Press: Chicago, IL.
Cecchetti, S.G., N.C. Mark and R. Sonora (2000), “Price Level Convergence among United States Cities: Lesson for the European Central Bank”, NBER Research Paper No. 7681.
Chowdhury, A.R., M.Q.Dao and A.N. Wahid (1995), “Monetary Policy, Output and Inflation in Bangladesh: A Dynamic Analysis”, Applied Economics Letters, 2(3), 51-55.
Christiano, L.J., M. Eichenbaum and C.L. Evans (1999), Monetary Policy Shocks: What Have We Learned and to What End?, in: J.B. Taylor, M.Woodford (Eds), “Handbook of Macroeconomics”, Edition 1, Elsevier.
Cooley, T.F. and S.F. LeRoy (1985), “A Theoretical Macro Econometrics: A Critique”, Journal of Monetary Economics, 16(3), 283-308.
Cushman, D.O. and T. Zha (1997), “Identifying Monetary Policy in A Small Open Economy Under Flexible Exchange Rates”, Journal of Monetary Economics, 39(3), 433-448.
Dungey, M., and A. Pagan (2000), “A Structural VAR Model of the Australian Economy”, Economic Record, 76(235), 321-342.
Friedman, B.M. and K.N. Kuttner (1992), “Money, Income, Prices, and Interest Rates”, The American Economic Review, 82(3), 472-492.
Friedman, M. and A. Schwartz (1963), “A Monetary History of the United States, 1867-1960”, Princeton University press for NBER.
Gramlich, E.M. (1971), “The Usefulness of Monetary and Fiscal Policy as Discretionary Stabilization Tools”, Journal of Money, Credit, and Banking, 3(2), 506-532.
Homaifar, G.A. and N. Zhang (2008), “Long Run Relationship between Money, Output, and Inflation”, Economia Internazionale / International Economics, 61(4), 687-709.
Jääskelä, J.P. and David Jennings (2011), “Monetary Policy and the Exchange Rate: Evaluation of VAR Models”, Journal of International Money and Finance, 30(7), 1358-1374.
Kashyap, A.K. and J.C. Stein (1994), Monetary Policy and Bank Lending, in: N. Gregory Mankiw (Ed.), “Monetary Policy”, The University of Chicago Press: Chicago, IL.
Keynes, J.M. (2007), “General Theory of Employment, Interest and Money”, Atlantic Publishers & Distributors (P) Ltd.
Kilian, L. (2012), “Structural Vector Autoregressions”, CEPR Discussion Papers No. 8515, C.E.P.R. University of Michigan.
Kim, S., and N. Roubini (2000), “Exchange Rate Anomalies in the Industrial Countries: A Solution with a Structural VAR Approach”, Journal of Monetary Economics, 45(3), 561-586.
Kouri, P.J. (1976), “The Exchange Rate and the Balance of Payments in the Short Run and the Long Run: A Monetary Approach”, The Scandinavian Journal of Economics, 78(2), 280-304.
Leeper, E.M., C.A. Sims and T. Zha (1996), “What does Monetary Policy Do?”, Brookings Papers on Economic Activity, 27(2), 1-78.
Leeuw, F. and E.M. Gramlich (1969), “The Channels of Monetary Policy: A Further Report on the Federal Reserve MIT Model”, The Journal of Finance, 24(2), 265-290.
Lütkepohl, H. and M. Krätzig (2004), Applied Time Series Econometrics, Cambridge University Press.
Mishkin, F.S. (2009), “Is Monetary Policy Effective During Financial Crises?”, NBER Working Paper No. 4678.
Narayan, P.K., S. Narayan, S. Mishra and R. Smyth (2012), “An Analysis of Fiji's Monetary Policy Transmission”, Studies in Economics and Finance, 29(1), 52-70.
Rahman, M.H. (2005), “Relative Effectiveness of Monetary and Fiscal Policies on Output Growth in Bangladesh: A VAR Approach”, Bangladesh Bank Working Paper Series No. 0601.
Schmidt, P. and R.N. Waud (1973), “The Almon Lag Technique and the Monetary versus Fiscal Policy Debate”, Journal of the American Statistical Association, 68,(341), 11-19.
Shapiro, M. and M. Watson (1988), “Sources of Business Cycles Fluctuations”, NBER Macroeconomics Annual 1988, Vol. 3,The MIT Press: Cambridge, MA.
Sims, C.A. (1986), “Are Forecasting Models Usable for Policy Analysis?” Federal Reserve Bank of Minneapolis Quarterly Review, 10(1), 2-16.
Sims, C.A. (1992), “Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy”, European Economic Review, 36(5), 975-1000.
Sims, C.A. and T. Zha (2006), “Does Monetary Policy Generate Recessions?”, Macroeconomic Dynamics, 10(2), 231-272.
Sukmana, R. and S.H. Kassim (2010), “Roles of the Islamic Banks in the Monetary Transmission Process in Malaysia”, International Journal of Islamic and Middle Eastern Finance and Management, 3(1), 7-19.
Taylor, J.B. (1995), “The Monetary Transmission Mechanism: An Empirical Framework”, The Journal of Economic Perspectives, 9(4), 11-26.
Tobin, J. (1970), “Money and Income: Post Hoc Ergo Propter Hoc?”, The Quarterly Journal of Economics, 84(2), 301-317.
Walsh, C.E. (2010), “Monetary Theory and Policy”, MIT Press: Cambridge, MA.
Zha, T. (1997), “Identifying Monetary Policy: A Primer”, Federal Reserve Bank of Atlanta Economic Review, 82(2), 26-43.

Recent Articles

Review’s Archive

Monetary Policy Transmission over the Real Sector of Bangladesh Economy: An SVAR Approach

Abstract

Read the full article

Bibliography

Register your account

Authors’ login

Institute for International Economics of the Genoa Chamber of Commerce

Institute for International Economics
of the Genoa Chamber of Commerce