Impact of Monetary Policy on the Economic Growth of a Developing Country: An Empirical Study on Bangladesh Economy

Abstract

Monetary policy plays a significant role in the economic growth of a developing country like Bangladesh by influencing the cost and availability of credit, inflation control and balance of payment. The current improving GDP growth of Bangladesh is the contribution of different components of monetary policy. This paper aims at identifying the impact of monetary policy on the overall economic development of Bangladesh. The purpose of the study is to develop a cause and effect relationship between the monetary policy and different economic factors that lead to economic growth of Bangladesh. To conduct this research data of last 20 years from 1997-2017 were collected. Primary data from 57 respondents from different commercial banks were collected to conduct this study. Different economic variables that affects a country’s GDP such as- inflation rate, employment rate, lending rate, borrowing rate, export-import growth rate, broad money growth rate, FDI rate in percent of GDP were used for this study. Both descriptive and inferential statistics were used in analyzing the data. Multivariate analysis technique like Exploratory factor analysis using SPSS version 20.0 was performed to identify the factors that influence the overall economic performance of Bangladesh. Multiple regressions were run to identify the relationship between monetary policy and the economic development of Bangladesh. The results show that factors like consumption, investment, government net expenditure and net export significantly affects the GDP growth of Bangladesh. The study also identifies that the monetary policy of Bangladesh has significant impact on these mediating factors. The research brings an important insight regarding the socio-economic development of Bangladesh by ensuring proper implication of the monetary policy. If the central bank and policy makers focus on the above significant factors Bangladesh will see more robust economic growth in the near future.

Keywords: Inflation rate, Lending rate, Broad money Growth, Net export, GDP growth

JEL Classification: E52