K Suranjit Deputy Director, Bangladesh Bank (BB) [The views - - PowerPoint PPT Presentation

K Suranjit Deputy Director, Bangladesh Bank (BB)

[The views expressed here do not necessarily reflect those of BB.]

Outline

 Background  Research Question  Literature Review  Data  Methodology  Findings  Conclusion and Limitation

Background

 Monetary policy of Bangladesh concerns about inflation,

growth, exchange rate, interest rate and money supply (BB,

2016);

 Contractionary policy shock increases real interest rate,

appreciates domestic currency, and decreases both inflationary expectations and output (Bhuiyan, 2013);

 Increasing the policy interest rate decreases output, and

appreciates local currency and increases the price level

(Alam 2015);

 Monetary policy plays a better role than fiscal policy in

accelerating the economic growth in Bangladesh (Maroney

et al, 2004; Hasan et al., 2016).

Background Contd.

 For monetary policy transmission mechanism the

• utput decomposition technique:

 explains the insight of economic traits,  identifies the underlying effective procedures

• f the monetary policy shocks to the particular

real sectors (Angeloni et al. 2003; Fujiwara 2004; Phan

2014).

 So far as I found, still there is no research about

this method for Bangladesh.

Research Question

 What is the more effective channel between the

consumption and investment for the monetary policy transmission mechanism in Bangladesh?

Literature Review

 Monetary policy affects the real economy mainly

through the interest rate and exchange rate

(Obstfeld & Rogoff, 1995);

 In Bangladesh monetary policy shocks transmit to

the real output through both the interest rate and exchange rate, however, interest rate instantaneously responds to exchange rate (Bhuiyan

2013);

 Exchange rate fluctuation affects the inflation in

Bangladesh (Akhtaruzzaman, 2005).

Literature Review Contd.

 The investment channel is superior in the Euro

area, whereas, consumption channel plays the major role in the USA (Angeloni et al., 2003);

 Investment channel

works better in Japan

(Fujiwara, 2004) and Australia (Phan 2014).

 The household

spending is still the main contributor to real GDP growth in the USA

(Fischer 2016);

Data

 Yearly data from 1973 to 2015 is used;  Nine variables: the household consumption,

investment, import, GDP deflator, total bank credit and central bank’s policy rate are collected from IMF (2016) while exchange rate is from WB (2016);

 “Other

GDP” (remaining) is calculated by deducting the consumption, investment and import from GDP;

 India’s GDP data is also from IMF (2016).

Data Description

 Trend of investment data (IMF, 2016) as a percentage

• f the GDP is almost same as central bank’s

historical data (BB 2016) available from the year 1989-90.

 Consumption data (IMF, 2016) is on average 5

percent lower than the central bank's data (BB

2016), while for consistency, IMF’s data is used.

 Consumption data usually contains some

seasonality effects; to address this issue and for easy interpretation, variables (except the interest rate) are transformed to the logarithmic form.

Data Description Contd.

 The nature of the output decomposition data of

Bangladesh is quite different from Australia, Japan, and the USA's data;

 The "other GDP" (after deducting “consumption”

and “investment”) component which is used in the literature is positive;

 For Bangladesh, "other GDP" becomes negative

for some years with a very high standard deviation.

 Negative value generates missing figures when

transforming in the logarithmic term, hence, another variable, the import (im) is used.

Methodology



and,

 Two recursive (Christiano et al. 1999)VAR models

(Specification 1 & 2) are used to examine the sensitivity of the investment and consumption for both the interest and the exchange rate shocks.

 Two non-recursive (Sims and Zha, 1998 and Kim

and Roubini, 2000) identification models (Specification 3 & 4) are also used by imposing restrictions on the contemporaneous parameters considering the conditions of the economy.

Methodology Contd.

 The relationship between the reduced form errors and

the structural disturbances for specification-1 (S-1) would be shaped as the following matrix form:

Methodology Contd.

 The structural matrix for the specification-4 (S-4) is

constructed as follows:

Methodology Contd.

 Granger causality test confirms that exchange rate

shock is statistically significant (rejects the null hypothesis) for the fluctuation in the consumption and price level both at 0.1 percent significant level while for the total credit the null hypothesis is rejected at 10 percent significant level;

 Considering the sample size and frequency one lag

is used following the SBIC. (Following Lutkepohl, 1985 and Enders, 2010)

Methodology Contd.

 The models satisfy the stability condition as all the

eigenvalues lie inside the unit circle;

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5

Findings: Response to Interest Rate Shock (S1)

• .06
• .04
• .02

.00 .02 .04 1 2 3 4 5 6 7 8 9 10

Consumption

• .08
• .04

.00 .04 1 2 3 4 5 6 7 8 9 10

Investment

• .06
• .04
• .02

.00 .02 1 2 3 4 5 6 7 8 9 10

Import

• .10
• .05

.00 .05 .10 .15 1 2 3 4 5 6 7 8 9 10

Other GDP

• .03
• .02
• .01

.00 .01 .02 .03 .04 1 2 3 4 5 6 7 8 9 10

DGP Deflator

• .2

.0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10

Policy rate

• .06
• .04
• .02

.00 .02 .04 1 2 3 4 5 6 7 8 9 10

Toal Credit

Findings: Response to Exchange Rate Shock (S2)

• .06
• .04
• .02

.00 .02 .04 1 2 3 4 5 6 7 8 9 10

Consumption

• .04
• .02

.00 .02 .04 .06 1 2 3 4 5 6 7 8 9 10

Investment

• .04
• .02

.00 .02 .04 1 2 3 4 5 6 7 8 9 10

Import

• .08
• .04

.00 .04 .08 .12 1 2 3 4 5 6 7 8 9 10

Other GDP

• .06
• .04
• .02

.00 .02 .04 1 2 3 4 5 6 7 8 9 10

GDP def lator

• .3
• .2
• .1

.0 .1 .2 .3 1 2 3 4 5 6 7 8 9 10

Policy Rate

• .04
• .02

.00 .02 .04 .06 .08 1 2 3 4 5 6 7 8 9 10

Total Credit

• .02

.00 .02 .04 .06 1 2 3 4 5 6 7 8 9 10

Exchange Rate

Findings: S1 with 4 lag

• .08
• .06
• .04
• .02

.00 .02 .04 5 10 15 20 25 30

Response of LCONS to LR

• .12
• .08
• .04

.00 .04 .08 5 10 15 20 25 30

Response of LI to LR

• .08
• .06
• .04
• .02

.00 .02 .04 5 10 15 20 25 30

Response of LIM to LR

• .12
• .08
• .04

.00 .04 .08 .12 5 10 15 20 25 30

Response of LY to LR

• .04
• .03
• .02
• .01

.00 .01 .02 5 10 15 20 25 30

Response of LP to LR

• .04

.00 .04 .08 5 10 15 20 25 30

Response of LR to LR

• .06
• .04
• .02

.00 .02 .04 5 10 15 20 25 30

Response of LTC to LR

Response to Cholesky One S.D. Innovations ± 2 S.E.

Findings: S2 with Exogenous Variable

• .06
• .04
• .02

.00 .02 .04 1 2 3 4 5 6 7 8 9 10

Response of LCONS to LEX

• .04
• .02

.00 .02 .04 1 2 3 4 5 6 7 8 9 10

Response of LI to LEX

• .03
• .02
• .01

.00 .01 .02 .03 1 2 3 4 5 6 7 8 9 10

Response of LIM to LEX

• .04

.00 .04 .08 .12 1 2 3 4 5 6 7 8 9 10

Response of LY to LEX

• .06
• .04
• .02

.00 .02 .04 1 2 3 4 5 6 7 8 9 10

Response of LP to LEX

• .3
• .2
• .1

.0 .1 .2 .3 1 2 3 4 5 6 7 8 9 10

Response of R to LEX

• .01

.00 .01 .02 .03 .04 .05 .06 1 2 3 4 5 6 7 8 9 10

Response of LTC to LEX

• .01

.00 .01 .02 .03 .04 .05 .06 1 2 3 4 5 6 7 8 9 10

Response of LEX to LEX

Response to Cholesky One S.D. Innovations ± 2 S.E.

Finding: Variance Decomposition of S2

Variables

Consu mption Investm ent Import Other GDP

GDP Deflator

Policy Rate Total Credit

Exchang e rate

Consumption

55.25 6.85 2.21 5.24 1.22 0.72 17.14 11.37

Investment

61.59 13.09 10.29 6.87 2.26 1.87 3.91 0.12

Import

19.29 2.1 61.27 1.34 2.97 4.68 7.22 1.13

Other GDP

36.61 1.75 3.14 46.22 8.02 0.31 1.28 2.67

Deflator

9.37 3.71 2.36 46.52 8.17 2.53 22.17 5.18

Policy Rate

47.5 1.42 0.4 18.89 1.94 26.99 2.24 0.63

Total Credit

0.16 0.77 0.14 51.8 6.96 3.4 28.12 8.65

Exchange rate

24.97 4.57 1.66 7.49 2.05 4.23 5.1 49.94

The raw variables’ percentage explained by column variables.

Findings: Responses to Exchange Rate Shock (non recursive) (S4)

• .08
• .04

.00 .04 .08 .12 1 2 3 4 5 6 7 8 9 10

Consumption

• .08
• .04

.00 .04 .08 .12 1 2 3 4 5 6 7 8 9 10

Investment

• .08
• .04

.00 .04 .08 .12 1 2 3 4 5 6 7 8 9 10

Import

• .3
• .2
• .1

.0 .1 .2 .3 .4 1 2 3 4 5 6 7 8 9 10

Other GDP

• .08
• .04

.00 .04 .08 .12 1 2 3 4 5 6 7 8 9 10

GDP Deflator

• .6
• .4
• .2

.0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10

Policy Rate

• .2
• .1

.0 .1 .2 .3 1 2 3 4 5 6 7 8 9 10

Total Credit

• .02

.00 .02 .04 .06 .08 1 2 3 4 5 6 7 8 9 10

Exchange Rate

Conclusion and Limitations

 Exchange rate shock affects more significantly on

the real economy mainly through consumption compare to investment.

 Policy interest rate shock does not significantly

affect but investment channel seems more responsive than consumption channel. However it becomes inconsistent in alternative specifications.

 This research proposes a minor modified model

that suite for economy of the developing countries like Bangladesh with negative net export.

Conclusion and Limitations Contd.

 Output decomposition method still have insights

which would helpful for the policy formulation.

 This working paper needs to address some further

issues regarding sample, cointegration along with the policy breaks.

Thank you!