Monetary Policy Transmission and Financial Stability in a LIC: The Case of Bangladesh

November 9, 2015

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Format: Chicago

Sohrab Rafiq. Monetary Policy Transmission and Financial Stability in a LIC: The Case of Bangladesh, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper explores how monetary policy affects the real economy and its efficacy in promoting financial stability in a large low income country. This paper shows that monetary policy modestly impacts real economic activity and inflation via the bank lending and financial accelerator channels. Second, money market and treasury rates signal changes in the policy stance, while altering banks’ intermediation cost curves due to shifting risk premia. At the same time, evidence points to monetary policy inducing an overshooting in asset prices. These findings suggest that financial stability could be undermined if the calibration of monetary policy is based solely on output and inflation without accounting for the stage of the financial cycle. Finally, the paper discusses policy measures that would enhance the transmission of monetary policy and promote financial stability in Bangladesh.

Subject: Asset prices, Bank credit, Banking, Credit, Inflation, Monetary base, Money, Prices

Keywords: A number of narrow money, Asset prices, Bank credit, Broad money stock variable, Call money, Channel of monetary policy transmission, Credit, Development, Financial market factor, Financial market friction, Financial risk, Global, Inflation, Liquidity, Market securities, Monetary base, Monetary policy, Monetary policy innovation, Monetary policy shock, Monetary policy transmission, Prices, Reaction function, Stock variable, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/231
Stock No:

WPIEA2015231
ISBN:

9781513549132
ISSN:

1018-5941

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