Does the monetary policy have any short-run and long-run effect on economic growth? A developing and a developed country perspective

Md Sayemul Islam,Nishat Sultana Ema,Md Emran Hossain,Sudipto Chakrobortty

doi:10.1108/ajeb-02-2021-0014

Md Sayemul Islam, Nishat Sultana Ema + Show 2 more

Open Access

https://doi.org/10.1108/ajeb-02-2021-0014

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Abstract

PurposeThe study aims to empirically examine the relationship between monetary policy and economic growth, as well as to explore the long-run and the short-run effect of monetary policy on the economic growth of a developing country (Bangladesh) and a developed country (the United Kingdom).Design/methodology/approachDepending on data availability, the study employed secondary data covering the period of 1980–2019. The augmented Dickey–Fuller test and the Phillips–Perron test were used for the stationarity test. Further, the F-bounds test was run to justify the long-run relationship between monetary policy and economic growth. Thereafter, long-run coefficients were revealed from the auto-regressive distributed lag (ARDL) model and short-run coefficients from the error correction model. Furthermore, the vector error correction model (VECM) Granger causality approach was employed to demonstrate the causality of studied variables. Lastly, different diagnostics tests ensured the robustness of the models.FindingsF-bounds test outcomes suggest that monetary policy has a long-run relationship with economic growth in both countries. Long-run coefficients revealed that money supply has a positive long-run impact on economic growth in both countries. Unlike the UK, the exchange rate exhibits an adverse effect on the economic growth of Bangladesh. The bank rate seems to promote economic growth for the UK. Findings also depict that increase in lending interest rates hurts the economic growth for both countries. Besides, the short-run coefficients portray random effects at different lags in both cases. Lastly, causality among studied variables is revealed using the VECM Granger causality approach.Originality/valueThe novelty of this study lies in consideration of both developing and developed countries in the same study.

Highlights

The monetary policy includes several policies by which a country controls its money stock to achieve macroeconomic goals
Bangladesh occupies a higher position in terms of money supply at the local currency unit, having a larger standard deviation than the United Kingdom (UK), which symbolizes that Bangladesh has profoundly fluctuated its money supply strategy
This paper explores the impact of monetary policy on the economic growth in a developing country represented by Bangladesh and a developed country represented by the UK

Summary

Introduction

The monetary policy includes several policies by which a country controls its money stock to achieve macroeconomic goals. Sound monetary policy aims to ensure inflation stability, keeping the balance of payments intact, reduce wages, attain financial growth and economic development (Criste and Lupu, 2014; Akalpler and Duhok, 2018). The prime role of Bangladesh’s monetary policy is to maintain fair price stability, ensure a stable balance of payments, maintain Bangladeshi taka’s external competitiveness, and achieve sustainable economic growth through increased productivity, employment, and real income (Alam, 2015). Notable reforms have occurred in Bangladesh’s regulatory, structural and financial policy system in the 1990s (Shah, 2009) These modifications enable Bangladesh Bank to conduct monetary policy based on marketbased instruments and blunt instruments to achieve smooth financial intermediation (Ahmed and Islam, 2004). Bangladesh Bank often puts itself in a detrimental situation to manipulate the monetary policy to foster its productive resources’ economic growth and development (Barkawi and Monnin, 2015)

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