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The Monetary Transmission Mechanism in Bangladesh: Bank Lending and Exchange Rate Channels

Author

Listed:
  • Ahmed , Shamim

    (Research Economists, Policy Analysis Unit, Research Department, Bangladesh)

  • Islam, Md. Ezazul

    (Research Economists, Policy Analysis Unit, Research Department, Bangladesh)

Abstract

In view of changes in legal, institutional and policy frameworks in the financial system of Bangladesh under the Financial Sector Reform Program (FSRP) initiated in the early 1990s, the paper attempted to empirically investigate whether bank lending and exchange rate channels exist in the economy through which monetary policy changes can influence aggregate output and prices. An assessment of the empirical evidence has been established through the unrestricted vector autoregressions (VARs) approach using quarterly data for the period of July-September 1979 to April-June 2005. The results of the empirical analysis suggest weak existence of both bank lending and exchange rate channels in the Bangladesh economy for the full-sample period as well as in the sub-sample period (i.e., January-March 1990 to April-June 2005). These findings have important implications with respect to the operation of monetary policy. Specifically, knowing the distinct active channels of monetary transmission in the economy would guide the monetary authority in formulating and conducting monetary policy pursuant to its objectives under the current regime, i.e., floating exchange rate and market based monetary policy instruments

Suggested Citation

  • Ahmed , Shamim & Islam, Md. Ezazul, 2004. "The Monetary Transmission Mechanism in Bangladesh: Bank Lending and Exchange Rate Channels," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 30(3-4), pages 31-88, Sept-Dec.
    • Handle: RePEc:ris:badest:0460
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    Citations

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    Cited by:

    1. Saidul Islam, 2024. "Investment-specific technology shocks and business cycle: evidence from a sign restriction approach," Indian Economic Review, Springer, vol. 59(1), pages 249-283, June.
    2. Daniel C. Hickman & William W. Olney, 2011. "Globalization and Investment in Human Capital," ILR Review, Cornell University, ILR School, vol. 64(4), pages 654-672, July.
    3. Rahaman, Ataur & Leon-Gonzalez, Roberto, 2021. "The effects of fiscal policy shocks in Bangladesh: An agnostic identification procedure," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 626-644.
    4. Didarul Islam, 2022. "Determinants of Domestic Bank Credit to Private sectors in Bangladesh: An Empirical Investigation," Journal of Economic Impact, Science Impact Publishers, vol. 4(2), pages 65-74.
    5. Montiel, Peter J & Spilimbergo, Antonio & Mishra, Prachi, 2010. "Monetary transmission in low income countries," CEPR Discussion Papers 7951, C.E.P.R. Discussion Papers.
    6. Roy, Ripon & Bashar, Omar H.N.M. & Bhattacharya, Prasad Sankar, 2023. "The cross-industry effects of monetary policy: New evidence from Bangladesh," Economic Modelling, Elsevier, vol. 127(C).
    7. Leandro Medina, 2018. "Assessing Fiscal Risks in Bangladesh," Asian Development Review, MIT Press, vol. 35(1), pages 196-222, March.
    8. Forhad, Abdur Rahman & Homaifar, Ghassem A. & Salimullah, Abul Hasnat Muhammed, 2017. "Monetary Policy Transmission Effect On The Real Sector Of The Bangladesh Economy: An Svar Approach," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 70(1), pages 25-46.
    9. Junankar, Pramod N. (Raja), 2019. "Monetary Policy, Growth and Employment in Developing Areas: A Review of the Literature," IZA Discussion Papers 12197, Institute of Labor Economics (IZA).
    10. Hossain, Md. Sajib & Hossain, Md. Amzad & Amin, Shabnaz, 2016. "An Empirical Analysis of the Relationship between Monetary Policy Stance and Stock Price in Bangladesh," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 39(1-2), pages 27-57, March-Jun.

    More about this item

    Keywords

    Monetary Transmission; Mechanism in Bangladesh; Bank Lending; Exchange Rate Channels;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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