Bangladesh Bank Training Academy Journal

Abstract

This paper examines the efficacy of the monetary transmission channels in Bangladesh using a five variable unrestricted vector auto-regression (VAR) technique for the sample period from June 2003 to June 2015. Several monetary transmission channels, i.e., interest rate channel, bank lending channel or credit channel, and the exchange rate channel, have been analyzed to investigate the efficacy of policy reforms undertaken in the arena of monetary and exchange rates since 2002. Results from estimated VAR show that money supply (M2) have significant impacts on output (GDP) and the price level (Inflation) in Bangladesh implying that the monetary policy transmission channels are effective in influencing real variables through banks portfolio. Although all the monetary transmission channels work in Bangladesh, the bank lending channel has relatively more impact than that of interest rate or exchange rate channel in Bangladesh. Conversely, this study finds that the policy rate responds to inlation implying that the transmission channels work from inflation to policy rate as the central bank responds to higher inflation by raising policy rate in Bangladesh.