Relative Impact of Fiscal and Monetary Policies on Bangladesh Economy: A Comprehensive Approach

Abstract

For developing countries like Bangladesh, understanding the relative impact of monetary and fiscal policies on GDP growth is crucial to formulate growth-enhancing policy decisions. This paper inspects into the relative effectiveness of these two policies on the real GDP growth of Bangladesh using ARDL, VECM and VAR estimation techniques to ensure comprehensiveness. From the results of all the three estimation techniques, it is seen that in the long run only fiscal policy has positive influence on growth while monetary policy stays either statistically insignificant or negative. In the short run, however, the results from the different estimation techniques are not much consistent. Here, ARDL technique shows that both money supply and government expenditure has statistically significant and positive effect on GDP while VAR-based Variance decomposition (VDC) and Impulse Response Functions (IRFs) state that only government expenditure has positive impact in the short run. In contrast, VECM technique reveals that neither money supply nor government expenditure has statistically significant impact in the short run. As from the results, it is apparent that government expenditure helps generating growth in the long run, it should be raised which may necessitate raising more government revenue. And, the main goal of monetary policy should be ensuring stability of the economy.