Impacts & Implications

This article is the partial fulfillment of the course Macroeconomics in 4th s

Submitted to,

S M Rakibul Anwar
Lecturer
Faculty of Business Administration
Coxs Bazar International
Submitted by,

MD Rifat Zahir
BBA 2nd Batch
ID: 2014201004
Faculty of Business Administration
Coxs Bazar International University

Under the authority of Central bank, monetary policy is a macroeconomic policy that involves controlling
of supply of money and rate of interest and is the demand side economic policy castoff by the government
of a country. The monetary policy is constructed to attain macroeconomic goals that involve inflation,
depletion, development and liquidity.
How It Works
The mechanisms employed by the Central bank work by increasing or decreasing total liquidity in the
economic system of a country. This takes account of the total amount of capital accessible for investment
expenditure, as well as money to lay away. In another sense, it's more than the supply of money, which
consists of broad money, M1, (currency in circulation + check deposits in the banking organization) and
M2 (M1 + money market funds + CDs + savings accounts). As a result, when people generally saying
that central bank tools affect only the money supply, they are letting the cat out of the bag about the
impacts of monetary policy.
Monetary Policy vs Fiscal Policy
It is usually better to construct a monetary policy in coordination with the fiscal policy of the national
government. The reason behind this is that elected officials of the national government get re-elected due
to the programs are undertaken by the government might be accepted by the people or might be rejected.
So the fiscal policy is in generally is expansionary. So, the monetary policy in generally tries to construct
a restrictive monetary policy.
Fatefully, during the last recession period (2008-2012), the world economy suffered a lot though the
Bangladesh economy had a stable position due to less contribution toward the export of goods. That
might be helped a little to face the crisis, but the economists and policy makers must stay alert around the
future concerns. Besides, this makes fiscal policy contradictory just when it is required to be
expansionary.
Tools of Monetary Policy
Most of the central banks follow commonly 3 mechanisms, though there are more to be followed. All
these mechanisms directly influence the liquidity in an economy system.
Bangladesh bank has five major mechanisms. Firstly, setting up a reserve requirement for the banking
system of Bangladesh, which instructs banks how much of their money must have in their vault? It was to
avoid the risks of lending 100% of banks money to the consumers.
Secondly, Bangladesh Bank can easily control banks reserve with the bank rate. This is the interest rate
for banks to be charged against each other to store excess cash when required overnight. This rate has a
vital influence over all interest rates, including bank loan rates and mortgage rates to the consumers.
Thirdly, another important instrument is used by the central bank to exert the monetary policy is the bank
discount rate. This is the rate charged by the central bank when it lends money to other banks in case of
emergency. This discount rate is in general higher than the bank rate.
Fourthly, the Bangladesh Bank uses OMO (Open Market Operation) to buy and sell treasuries and other
government securities from its member banks. This mechanism changes the amount of reserves banks
actually have on hands to lend, without changing the reserve requirement set by central bank.
Fifthly, like many central banks, the Bangladesh bank tries to keep the inflation rate in an expected ratio.
Thats because it is usual for the people to buy now if they can expect an increase in price.
1 | Page

Findings of the Monetary Policy of Bangladesh

Monetary policy 2011

Monetary policy 2011 (January-June)
Objectives
&
Targets

Implications

Impacts

1.
2.
3.
4.
5.
6.

Support governments goal.

More rapid economic growth.
Reduction of poverty
Stability in general price level.
Control over broad money (M1) growth.
Preserve money stock weight.

1. Adjusting general price levels by manipulating both major

financial sector prices & broad money (M2) growth.
2. Changes in reserve money to control broad money growth.
3. Management of day to day cash money and liquidity.
4. The increase of money stock gets prevented due to funds flows in
the local market.
1. Increased activities of agriculture sector are output.
2. Strongly increased Exports returned.
3. Increased quantum index of medium & large scale industries.
4. Weakened quantum index of Small scale industries.
5. Weakened Growth in workers remittance inflows.
6. Increasing local credit growth.
7. Slower growth in Global output.
8. No change in risk factors of external sector.
9. Increasing global prices of merchandises remain same in
Bangladesh.

Monetary policy 2011 (July -December)

1.
2.
3.
4.
5.

Expand the short term development in local and global aspects.

Preserve expected inflation rate.
Control over the real price level.
Stability in general price level.
Preserve money stock weight.

1. Interventions in policy interest rate and quantity based money

stock.
2. To increase the reserve money, day to day management is
implemented.
1.
2.
3.
4.
5.
6.

Substantially increasing productivity and investment activity.

GDP growth is precise close to target.
Increasing growth in Industrial sector.
Increasing growth in Service sector.
Decreased growth in Agriculture sector.
The inflation is increased a little more.

Monetary policy 2012

Monetary policy 2012 (January-June)
Objectives
&
Targets

1. To keep expected inflation rate.

2. Provide enough information to households and firms in order to
plan their savings and investment choices.
3. Review of recent economic development.
4. Ensuring sufficient credit in private sector.
5. Discontinue foreign reserve depletion.

Monetary policy 2012 (July -December)

1. To keep expected inflation rate.
2. Review of recent economic development.

2 | Page

Implications

Impacts

1. Increasing government borrowing from banking system to control

liquidity of commercial bank.
2. Following of a restraining monetary policy.
1. Uncertain expected global growth due to growing debt crisis in
supporting countries.
2. Stable Economic environments in local and global aspects.
3. Effective control over inflation rate.
4. Gap in balance of payment cannot be met.

1. Following of a restraining monetary policy.

2. Increasing government borrowing from banking system to control
liquidity of commercial bank.
3. Provide easy access to credit for private sector.
1. Stable Economic environments in local and global aspects.
2. Increased investment in private sector.
3. Failure to achieve expected inflation rate.
4. Healthy growth to fill the gap in balance of payment.

Monetary policy 2013

Monetary policy 2013 (January-June)
Objectives
&
Targets

Implications

Impacts

1.
2.
3.
4.
5.
6.
7.

Growth in Broad money.

Growth in reserve money.
Growth in local credit availability.
Decrease growth in unproductive sector.
Emphasize growth in agro and SME sector.
Growth in GDP.
Growth in remittance earning.

1. Adjusting general price levels by manipulating both major

financial sector prices & broad money (M2) growth.
2. Changes in reserve money to control broad money growth.
3. Management of day to day cash money and liquidity.
4. The increase of money stock gets prevented due to funds flows in
the local market.
1. GDP has a realistic growth.
2. Increase in net Foreign Assets.
3. Government borrowing is in expected ratio.
4. Low bank profitability.
5. Increase in reserve money with a reduction in broad money
supply.

Monetary policy 2013 (July -December)

1.
2.
3.
4.
5.
6.

Decrease in inflation rate.

Growth in GDP.
Reset growth target of Broad money.
reset growth in reserve money
Reset growth in local credit.
Reset growth in private sector credit.

1. Adjusting general price levels by manipulating both major

financial sector prices & broad money (M2) growth.
2. Changes in reserve money to control broad money growth.
3. The increase of money stock gets prevented due to funds flows in
the local market.
1.
2.
3.
4.

Increase of money value.

Satisfactory growth in GDP.
High growth of credit ratio.
Higher rate of interest.

Monetary policy 2014

3 | Page

Monetary policy 2014 (January-June)

Objectives
&
Targets

Implications

Impacts

1.
2.
3.
4.
5.
6.
1.
2.
3.
1.
2.
3.
4.
5.

Attain expected inflation rate.

Growth in reserve money.
Decrease growth in unproductive sector.
Emphasize growth in agro and SME sector.
Growth in GDP.
Growth in remittance earning.
Monetary program framework to limit reserve money growth.
The increase of money stock gets prevented due to funds flows in
the local market.
Specialized Monetary program for lending to encourage
investment in private sector.
Increased trading activities.
Decreased industrial credit.
Growth in working capital finance.
Unchanged loan share in construction sector.
Growth in loan for agricultural sector.

Monetary policy 2014 (July -December)

1.
2.
3.
4.
5.

Attain expected inflation rate.

Growth in GDP.
Reset growth target of Broad money.
Growth in GDP.
Growth in remittance earning.

1. Changes in reserve money to control broad money growth.

2. Adjusting general price levels by manipulating both major
financial sector prices & broad money (M2) growth.
3. The increase of money stock gets prevented due to funds flows in
the local market.
1. Increase of money value.
2. Satisfactory growth in GDP.
3. High growth of credit ratio.
4. Higher rate of interest.

Monetary policy 2015

Monetary policy 2015 (January-June)
Objectives
&
Targets
Implications

Impacts

Monetary policy 2015 (July -December)

1. Growth in GDP.
2. Attain expected inflation rate.

1. Attain expected inflation rate.

2. Growth in GDP.

1. Monetary program framework to limit reserve money growth.

2. The increase of money stock gets prevented due to funds flows in
the local market.
3. Specialized Monetary program for lending to encourage
investment in private sector.
1. Increase of money value.
2. Satisfactory growth in GDP.
3. High growth of credit ratio.
4. Higher rate of interest.

1. Changes in reserve money to control broad money growth.

2. Adjusting general price levels by manipulating both major
financial sector prices & broad money (M2) growth.
3. The increase of money stock gets prevented due to funds flows in
the local market.
1. Increase of money value.
2. Satisfactory growth in GDP.
3. High growth of credit ratio.
4. Higher rate of interest.

4 | Page

Analysis of the monetary policy in Bangladesh

In case of a developing country like Bangladesh, Monetary policy plays a key role in looking after the
rate of growth of the economy of a nation by manipulating and adjusting the accessibility to credit, by
maintaining a moderate inflation rate and maintaining an equilibrium position in the Balance of Payment.
Hence the key goal of a monetary policy in developing economy like Bangladesh is to control credit for
maintaining the expected inflation rate and to maintain a steady general price level, to maintain a stable
the foreign exchange rate, to attain an equilibrium position in the BOP (Balance of Payment) and overall
promotion of economic development.

To Control Inflation:
Monetary policy exercises both quantitative and qualitative tools to control credit, in the process of
developing its economy system and of course to handle the pressures arises from inflation in the
economy. Among those instruments used by Bangladesh Bank to maintain the monetary policy, OMOs
(Open Market Operation) are not effective in maintaining inflation rate at expected level due to copper
market in Bangladesh is low and yet developing.
Due to Bangladesh Banks unestablished control over banking system, commercial banks linger on a
supple cash-deposit ratio. They are also showing less interest in government securities due to their
relatively lower rate of return (interest rate). What is more, as an alternative they decide on holding their
reserves in liquid level, for instance gold, foreign exchange and cash. Commercial Banks in Bangladesh
are also not interested in practice of borrowing from Bangladesh Bank.
The NBFIs (Non-banking Financial Institutions) dont hold on their deposits, as the Bangladesh Bank has
less control over them.

To Attain Price Stability:

Monetary policy is an important mechanism for the Bangladesh Bank to defend the general price level of
the commodities in the local market of Bangladesh. The monetary policy helps the Bangladesh Bank to
set the variance between the demand side and the supply side of the money in Bangladeshi economy. Any
disparity between these two will be mirrored in the general price level. It is a crucial matter for the
Bangladesh bank or any other central bank, as the delay in the money supply will hamper the economic
growth of the economy, again excess money injected into the economy will bring in the inflation. As the
country walks the path of economic growth, the necessity of money supply increases as well due to
regular monetarization of the previously non-monetized sector, and of course the increase of national
output especially in the agricultural and industrial sector. All these factors are keenly integrated into any
economic system, and will denote the increase in demand for business proceedings as well as projected
motives. Therefore, Bangladesh bank needs to fabricate such a monetary policy that will coordinate all
these factors to maintain a steady growth of the economy.

To Bridge BOP Deficit:

To bridge in the BOP (Balance of Payment) deficit, monetary policy plays an important role in forming of
the rate of interest policy. To meet the planned development goals, developing countries like Bangladesh
follows a strict fraction of payments problems. To foster the infrastructural growth and productive sector
of the economy, developing countries have to import vast capital kits, equipment, raw materials,
technologies, spares and ingredients in so doing, causing high imports. On the contrary, exports are not
that much to contribute to the economy in this phase. As an outcome, a disparity is formed between
5 | Page

imports and exports. Monetary policy is the mechanism that can serve to fill this gap by following a high
rate. A high rate of interest promotes the inflow of foreign currencies in form of investment which assist
in filling the gap in the remainder of payments.

Interest Rate Policy:

In developing countries like ours, a policy with a higher rate of interest can boost personal savings of the
people that will assist our banking system to develop as the people will be adopting more baking habits.
The monetization of the non-monetized sector will be fostered as well as the intermediary role of the
financial institutions will be brighter. Most of all, a monetary policy with a higher rate of interest is in
nature anti-inflationary.
Furthermore, high interest rate assists in the allotment of scarce capital resources in more industrious
manners. In some instances, a higher rate of interest discourages new investment, but most of the
economists think of it is not the issue as the investment is interest inelastic in developing countries like
Bangladesh. This is because; interest pays out only a minimum percentage of the total monetary value of
the investment. Despite these lines, in case of Bangladesh as a developing economy, it will be suggested
to create a monetary policy that will be discriminatory in nature.

To Create Banking and Financial Institutions:

A key target of the monetary policy of Bangladesh Bank is to develop the financial institutions in order to
boost up the capital formation through the mobilization of scarce capital in the economy. Under this
incentive, Bangladesh bank is encouraging commercial banks to promote their banking activities in rural
regions of Bangladesh. So Bangladesh bank focuses on forming such a monetary policy that will assist in
monetizing the previously non-monetized sector and further up the capital formation in the economy. All
these facts are highly crucial for the growth of any developing economy like Bangladesh.

Debt Management:
Debt management is another critical role played by the monetary policy to foster the economic growth in
developing countries like Bangladesh. It is the functioning of a central bank which trades with proper
timing and issuing government bonds and securities, adjusting the price of securities at a steady level and
of course minimizing the cost of availing the public debt.
As a result, as denoted above, a good monetary policy helps in keeping the inflation rate at expected level,
bridging the gap in balance of payment (BOP), promoting formation of capital and overall development
of an economic system.

Insurance Recommendations
In order to have a deep insights of the connection among the monetary policy, price sustainability,
inflation rate, foreign exchange rate, interest rate in sense of fostering the overall economic growth of
Bangladeshi economy, yet only for policy recommendations, further study is necessary for sure. However,
some recommendations as follows may offer an initial assistance for future activities of Bangladesh Bank
in case of forming an integrated monetary policy:
1. Further research should be encouraged to explore more insights regarding the connection among
general price level of commodities, supply and demand side of money, credit growth, and the
economic sustainability of the country.
2. Impacts of interest rate on green investment should be evaluated more precisely.
6 | Page

3. The target of monetary policy should be disclosed to mass people and their opinions regarding the
policy should be reflected in further policy development.
4. Monthly review of the progress regarding control over the inflation rate and changes in the BNPI
(Basic Need Price Index) is necessary.
5. Inflation problem faced by the rural region of Bangladesh should be reflected in further policy
formation.
6. Overview of targeted refinancing lines with outstanding debt and relevant information should be
added to website of Bangladesh bank, as well as people should be concerned about these policy
decisions.
7. Monthly review and assessment of targeted credit quotas and ceilings, and further alignment in this
issue is strongly recommended to encourage investment.
8. Intensive care and evaluation capacity should be formed by the central bank to evaluate the targeted
refinancing lines.
9. Diversified strategies to attain sustainable economic growth should reflect the opinions of the mass
people.

7 | Page

Works Cited
Abdullah, M. N., Parvez, K., & Tooheen, R. B. (2012). Impacts of Monetary Policy on Inflation in.
Global Disclosure of Economics and Business, 1(2), 38-54. Retrieved May 2016
Chowdhury, L. S., & Afzal, M. N. (2015). The Effectiveness of Monetary Policy and Fiscal Policy in
Bangladesh. Journal of Applied Business and Economics, 17, 78-85. Retrieved May 2016
Islam, M. A. (2010, December). Monetary Policy and Money Supply Process. Dhaka, Bangladesh: BRAC
University. Retrieved May 2016
Muktadir-Al-Mukit, D. (2013, July ). An Econometric Analysis of the Impact of Monetary Policy. World
Review of Business Research, 3, 16 29. Retrieved May 2016
Noman, S. M., & Khudri, M. M. (2015). The Effects of Monetary and Fiscal Policies on Economic
Growth in. ELK Asia Pacific Journal of Finance and Risk Management, 6(3), 21-34.
doi:10.16962/EAPJFRM/6_3_2
Sayera Younus. (2010, February). mpact of Monetary Policy Changes in a SemiGlobal Economy:
Evidence from Bangladesh. Policy Analysis Unit (PAU), Bangladesh Bank. Retrieved May 2016,
from www.bangladeshbank.org.bd
UNNAYAN ONNESHAN. (2014, January). Monetary Policy Statement (January - June, 2014):An
Assessment. Bangladesh Economic Update January 2014, 5. Retrieved May 2016, from
www.unnayan.org
Brons, M., Groot, H.L.F. and Nijkamp, P. (1999). Growth Effects of Fiscal Policies: A Comparative
Analysis in a Multi-Country Context. Tinbergen Institute Discussion Papers. Number 99- 042/3,
June.
hmed,

Mudabber, MoneyIncome and MoneyPrice

Countries: Some Econometric Exercises. The
September 200203), pp. 5562.

Causality in Selected SAARC

Indian Economic Journal (July

AmuedoDorantes, Catalina; Wheeler, Mark, An Empirical Analysis of the European

Unions Impact on Spanish Economic Performance, Applied Economics, (June 2001), pp. 1001
1008
Basurto, Gabriela; Ghosh, Atish, The Interest
Crisis Countries, IMF Working Paper
Washington, DC.

RateExchange Rate
00/19, International

Nexus in
Monetary

Asian
Fund,

Bernanke, B., Alternative Explanations of the MoneyIncome Correlation, CarnegieRochester

Conference Series on Public Policy, (Autumn 1986), pp. 49100.
Bernanke, B.; Blinder, A. S., The Federal Funds Rate and the Channels of Monetary
Transmission, American Economic Review, (September 1992), pp. 901921.
Bernanke, B.S., Gertler, M. and Watson, M., Systematic Monetary Policy and the
Effects of Oil Price Shocks, Brookings Papers on Economic Activity, (1997), pp. 91
142.

8 | Page

Borda, P; Manioc, O; Montauban, G.T., The Contribution of U.S. Monetary Policy to

Caribbean Business Cycles, Social and Economic Studies, Special Issue, (June
Septermber 2000), pp. 225250.
Cushman, David; Zha, Tao, Identifying Monetary Policy in a Small Open Economy
Under Flexible Exchange Rates, Federal Reserve Bank of Atlanta, Working Paper 957, (October
1995), pp. 132.
Enders,

W., Applied
(1995).

Econometric

Time

Series,

John

Farrell,

Mike, International Impact of U.S. Money

American Economic Review, (June 1980), pp. 433443.

Wiley &

Friedman, Benjamin; Kuttner, K., Money, Income,

American Economic Review, (June 1992), pp. 472492

Supply:
Prices,

Hoffmaister, A., J. Roldos; P. Wickman, Macroeconomic

Africa, IMF Working Paper No. 97.82, (July 1997).

Sons,
The

New

Case

and

Fluctuations

York,
of

Mexico,

Interest
in

NY,

Rates,

SubSaharan

Hossain

Akhtar (1995), Inflation, Economic Growth and the Balance of Payments in

Bangladesh: A Macroeconomic Study (Delhi: The Oxford University Press; Dhaka: The
University Press Limited, 1995). (ISBN:019563108 0, pp.viii+396)

Hossain

Akhtar (1996a), Macroeconomic Issues and Policies: The Case of Bangladesh

(New Delhi/Thousand Oaks/London: The Sage Publications; Dhaka: The University
Press Limited, 1996). (ISBN:8170365139, India HB: ISBN:0803992793, USHB,
pp.333)

Hossain

Akhtar(2000), Exchange Rates,

The University Press Limited, 2000

Hossain

Akhtar (1996a), Macroeconomic Issues and Policies: The Case of Bangladesh

(New Delhi/Thousand Oaks/London: The Sage Publications; Dhaka: The University
Press Limited, 1996). (ISBN:8170365139, India HB: ISBN:0803992793, USHB,
pp.333)

Capital

Flows

and

International

Trade,

Dhaka:

Leeper, Eric M.; Sims A. Christopher; Zha, Tao, What Does Monetary Policy Do?
Brookings Papers on Economic Activity, (1996), pp
McCandless Jr, George T.; Weber E. Warren, Some Monetary Facts, Federal Reserve
Bank of Minneapolis Quarterly Review ,(Summer, 1995), pp. 211.
McMillin, W.D., Monetary Policy and
Business, (October 1996), pp. 315335.

Bank

Portfolios,

Journal

of

Economics

and

Mixon, J. Wilson; Pratt J. Leila; Wallace, S. Myles, CrossNational Money to Income

Causality: U.S. Money to U.K. Income, Journal of Money, Credit and Banking,
(November 1979), pp. 419426.

9 | Page

Mohan;

R, "Monetary Policy and Exchange Rate Frameworks: The Indian Experience

Presentation by Deputy Governor, Reserve Bank of India at the Second High Level
Seminar on Asian Financial Integration organized by the International Monetary Fund and
Monetary Authority of Singapore in Singapore on May 25, 2006.

Ozdemir,Nilufer (2008), Effects of Monetary Policy Coordination on the Transmission o

f External Shocks to Small Open Economies ",University of North Carolina at Chapel Hills,
November .
Reddy, Y. V., "Role of Monetary Policy in Attaining Growth with Stability: The Indian
Experience," Address by Governor, Reserve Bank of India at the Bank of Greece,
Athens, Greece on April 2, 2007

10 | P a g e