Interest Rate Responsiveness of Investment Spending in Bangladesh
Author: Shamim Ahmed & Md Ezazul Islam
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Bangladesh initiated the Financial Sector Reform Programs (FSRPs) at the beginning of the 1990s. One of the objectives of this comprehensive program was to provide better return on deposits and allocate credits efficiently in the financial market by moving towards a market based interest rate regime from an administered interest rate regime, thereby promoting economic growth through increased investment spending. In this connection, the paper empirically investigates whether interest rate liberalization pursued under the FSRP has been able to create a competitive environment in the financial market where investment spending at the aggregate level as well as in disaggregate terms is responsive to the respective lending rates. Using quarterly data set for the period of October-December 1979 to April-June 2005, an assessment of empirical evidence has been established through the unrestricted vector autoregressions (VARs) approach. The results of the empirical analysis suggest that investment spending at the aggregate level is non-responsive to interest rates. Besides, investment spending at the disaggregate level is still not responsive to interest rates except for private sector investment category which is only moderately responsive from the lenders’ point of view in the short-run. These results have important policy implications for both domestic policy makers and the development partners in assessing the achievement of the objectives of the FSRP and taking further policy actions.
Exchange Rate Pass-Through in Bangladesh's Export Prices: An Empirical Investigation
Author: Mohammad Mainul Hoque & Abdur Razzaque
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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
The Small Country Assumption, Econometric Estimates and Policy Making: A Reassessment with Bangladesh's RMG Exports to the European Union
Author: Abdur Razzaque
Most empirical studies on Bangladesh have found the price elasticity of demand for the country’s exports to be quite small – considerably lower than one (absolutely). These econometric estimates have a serious implicit implication in terms of challenging the policy of export promotion since in the presence of such highly price inelastic demand the optimal trade policy option will be to impose taxes on exports rather than to provide incentives. It is also difficult to perceive why the country should have such a strong market power, as reflected in the low price elasticity estimates, when close substitutes for its export items are widely available in international markets. By empirically estimating a theoretical model, this paper demonstrates that the demand elasticity for exports of RMG to the European Union (EU) is much higher than the conventional estimates. This evidence suggests that Bangladesh may be considered as a “small” country, which is compatible with the policy of export promotion and trade liberalization.