Bangladesh Bank Training Academy Journal

Abstract

This article empirically examines the dynamics of the interest rate pass-through mechanism for Bangladesh, by formulating and using an independent variable 'weighted average policy rate' (a combine rate constituted by using all policy rates of Bangladesh Bank - the central bank of Bangladesh) and lending rate, deposit rate and call money rate as dependent variables representing the lending, deposit and money market channels, respectively. We have used quarterly data for the period of 2003,Q1 -2015,Q4 published by Bangladesh Bank. The commonly used error correction and Engle-Granger (EG) models are used to examine the short-run and long-run pass-through respectively; a vector error correction (VECM) impulse response function (IRF) were employed to measure the short-run speed of the pass-through. Further, the Wald Test of Coefficient was used to measure the magnitude of the long run pass-through. We find that there is a symmetric, incomplete and very sluggish pass-through in Bangladesh fr all lending, deposit and money market channels. We also found the greatest impact on the lending rate channel (40 percent) in short-run, while the adjustment speed is very slow in the all channels. In our understanding such paled profile of Interest Rate Pass-though in Bangladesh is due to non-reliance of Bangladesh Bank on interest rate tool for implementation of monetary policy.