Candidate: Sayera Younus

Degree of: Doctor of Philosophy

Department: Economics

Title: Essays on Monetary Policy in Bangladesh

Committee:
Dr. Mark Wheeler, Chair
Dr. Eskander Alvi
Dr. J. Kevin Corder

Date: Wednesday, October 15, 2003 1:00pm - 3:00pm
5302 Friedmann

Abstract: The Bangladesh Bank, the central bank in Bangladesh, is responsible for formulation and implementation of monetary policy. According to the Bangladesh Bank order of 1972, the main functions of monetary policy in Bangladesh are: (1) to maintain reasonable price stability, (2) to ensure a stable balance of payment position and maintain an external competitiveness of the Bangladesh Taka, and (3) obtain sustained economic growth through increased production, employment and real income. Therefore, this dissertation consists of three essays that illustrate the main functions of the monetary policy in Bangladesh.
Because there is no consensus regarding the best indicator of monetary policy, three measures of monetary policy are used. Some economists, including Bernanke (1992), put emphasis on the interest rate and argue that the federal fund rate is the best indicator of monetary policy, especially for the U.S. Others, including Basurto and Ghosh (2000), argue that monetary aggregates are the best measures of the monetary policy, especially for the East Asian developing countries. Therefore, this dissertation uses monetary aggregates because most of the studies on developing countries use monetary aggregates rather than interest rate as a measure of monetary policy.
In the first essay, consistent with the previous literature, M1 is used as the measure of monetary policy. The monetary base and domestic credit are used in the second and third essays because these two components are under the direct control of the central bank. In addition, the use of these variables is consistent with the existing literature on credit channels and exchange market pressure discussed in essays two and three.
In the first essay, effectiveness and independence of monetary policy in altering economic activity and the price level is examined using impulse response functions (IRFs) and variance decompositions (VDCs). The IRFs and VDCs are derived from a near vector auto regression (NVAR). In the second essay, the impact of monetary policy on bank portfolios is analyzed. IRFs and VDCs, derived from structural (Bernanke, 1986) VAR and a VAR with Cholesky decompositions, are used to examine the monetary policy transmission mechanism in Bangladesh. That is, VDCs and IRFs are used to examine the impact of the monetary base on bank credit and deposits and the impact of bank credit and deposits on the price level and output. The third essay illustrates the relationship between monetary policy and exchange market pressure. Engle and Granger's (1987) two-step single-equation model is used to examine Girton and Roper's (1977) monetary model of the EMP. IRFs and VDCs, derived from a vector error correction model (VECM), are also used to examine the impact of the monetary policy, foreign inflation (U.S. and India), the growth rate of domestic real income, and the money multiplier on EMP.

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