Effectiveness of Monetary Policy in Bangladesh

This paper uses Structural Vector Autoregression models with appropriate short run restrictions to see the response of output, price and exchange rate to an exogenous monetary–policy shock in Bangladesh. The impulse response functions show that an independent increase in policy interest rate is followed by decrease in output, appreciation of local currency, and increase in price level. However, the impacts are not statistically significant, implying that monetary policy is not effective in controlling short run economic fluctuations in Bangladesh. ‘Prevalence of microcredit’ and ‘government domestic borrowing’ may weaken the effectiveness of monetary policy. Thus, when conducting the monetary policy to achieve certain goals, the central bank of Bangladesh should consider the reality of microcredit and government domestic borrowing.