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Does monetary policy matter in a less developed economy? Evidence from Bangladesh

conference contribution
posted on 2008-01-01, 00:00 authored by Omar BasharOmar Bashar
This paper explores the role of monetary policy in the context of a less developed economy. Monetary transmission mechanisms in less developed economies can be quite different from an industrialized economy, as unlike industrialized countries, these economies are characterized by the small size of organized financial markets, limited substitutability between money and other assets and weak fiscal and monetary institutions. We utilize the Structural VAR approach to analyze the monetary transmission process and impacts of monetary policy on different macro variables in Bangladesh. Monetary policy shocks are identified using non-recursive contemporaneous restrictions, which are based on the Central Bank's reaction function and the structure of the economy. We found strong evidence for the interest rate channel of monetary policy in Bangladesh. Our findings indicate that monetary policy shocks are important sources of fluctuations in the rate of interest, output and prices. Expansionary monetary policies are found to be harmful for achieving price stability in Bangladesh, as they not only increase the prices permanently, but also make the price level more volatile. We also found the evidence of a long lasting effect of monetary policy on output, which suggests that contractionary policy measures may create sustained recession in Bangladesh.

History

Event

Australian Conference of Economists (37th : 2008 : Gold Coast, Queensland)

Pagination

1 - 35

Publisher

Economic Society of Australia

Location

Gold Coast, Queensland, Australia

Place of publication

Brisbane, Qld.

Start date

2008-09-30

End date

2008-10-04

ISBN-13

9780959180640

Language

eng

Publication classification

E1.1 Full written paper - refereed; E Conference publication

Copyright notice

2008, ACE

Title of proceedings

ACE 2008 : Proceedings of the 37th Australian Conference of Economists

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