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The Relative Effectiveness of Monetary and Fiscal ‬Policies on Economic Growth in Bangladesh‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬

Published in Economics (Volume 5, Issue 1)
Received: 7 January 2016     Accepted: 15 January 2016     Published: 31 January 2016
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Abstract

This study explores the relative effectiveness of monetary and fiscal policies on economic growth in Bangladesh for the period from fiscal year 1974 to2015 employing cointegration and Vector Error Correction Model (VECM). We use nominal GDP as a proxy for economic growth, while broad money supply (M2) and reserve money (RM) as proxies for monetary policy. Total government revenue (TR) and total government expenditure (TE) are used as proxies for fiscal policy. The Johansen cointegration tests reveal that monetary policy (M2 and RM) has a greater long run positive impact on economic growth over fiscal policy in Bangladesh. The results of VECM show that there is a weak long run causality running from monetary and fiscal policies to economic growth. VECM also finds that GDP, M2 and TR play a part to adjust any disequilibrium, while TR picks up the disequilibrium rapidly and guides the variables of the system back to equilibrium. VECM Granger causality/block exogeneity Wald test results show that M2 is the leading indicator with respect to economic growth in Bangladesh in the short run. Moreover, economic growth is a leading indicator with respect to fiscal policy in the short run. Thus, we conclude that monetary policy is the more effective channel than fiscal policy to promote economic growth in the short run and long run in Bangladesh.

Published in Economics (Volume 5, Issue 1)
DOI 10.11648/j.eco.20160501.11
Page(s) 1-7
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2016. Published by Science Publishing Group

Keywords

Economic Growth, Monetary Policy, Fiscal Policy, Cointegration, Causality

References
[1] Friedman, M. & Schwartz, A. (1963). A monetary history of the United States, 1867-1960. Princeton: Princeton University Press.
[2] Ando, A. & Modigliani, F. (1965). The relative stability of monetary velocity and the multiplier. American Economic Review, 3: 693-728.
[3] Andersen, L. C. & Jordan, J. L. (1968). Monetary and fiscal actions: a test of their relative importance in economic stabilization. Federal Reserve Bank of St. Louis Review, 52: 7-27.
[4] Ajayi, S.I. (1974). An econometric case study of the relative importance of monetary and fiscal policy in Nigeria. The Bangladesh Economic Review, 2(2): 559-576.
[5] Latif, E. & Chowdhury, M. H. (1998), Relative effectiveness of monetary and fiscal policy, Bank Parikrama, 23: 1&2: 97-105.
[6] Ajisafe, R. A. & Folorunso, B. A. (2002). The relative effectiveness of fiscal and monetary policy in macroeconomic management in Nigeria. The African Economic and Business Review, 3(1): 23-40.
[7] Rahman, M. H. (2005). Relative effectiveness of monetary and fiscal policies on output growth in Bangladesh: a VAR approach, Bangladesh Bank Working Paper Series: WP 0601.
[8] Ali, S. Irum, S. & Ali, A. (2008). Whether fiscal stance or monetary policy is effective for economic growth in case of South Asian countries. The Pakistan Development Review, 47(4): 791-799.
[9] Jawaid, S. T. Arif, I. & Naeemullah, S. M. (2010). Comparative analysis of monetary and fiscal policy: a case study of Pakistan. NICE Research Journal, 3: 58-67.
[10] Senbet, D. (2011). The relative impact of fiscal versus monetary actions on output: a Vector Autoregressive (VAR) approach. Business and Economic Journal, 25: 1-11. Retrieved from http://astonjournals.com/manuscripts/Vol2011/BEJ25Vol2011.pdf.
[11] Chowdhury, A. Fackler, J. S. & McMillin, W. D. (1986). Monetary policy, fiscal policy and investment spending: An empirical analysis. Southern Economic Journal, 52(3): 794-805.
[12] Ministry of Planning, People’s Republic of Bangladesh, (2011). Sixth Five Year Plan FY2011-FY2015: Accelerating growth and reducing poverty, viewed 10 November 2014, http://www.plancomm.gov.bd/sixth-five-year-plan/
[13] Bangladesh Bank. (2015). Monthly Economic Trends. https://www.bb.org.bd/econdata/time_series_data1972-2015.xls
[14] Ministry of Finance. (2013). People’s Republic of Bangladesh. Bangladesh Economic Review 2013.
[15] Asteriou, D. & Price, S. (2007). Applied econometrics: a modern approach, New York: Palgrave Macmillan Inc.
[16] Phillips, P. C. B. & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75 (2): 335-346.
[17] Johansen, S. & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52 (2): 169-210.
[18] Enders, W. (2004). Applied econometric time series. 2nd ed., John Wiley & Sons Inc, New York.
[19] Johansen, S. (1988). Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control, 12: 231-54.
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  • APA Style

    Md. ‬ Abu Hasan, Md. Ashraful Islam, Md. Abul Hasnat, Md. Abdul Wadud. (2016). The Relative Effectiveness of Monetary and Fiscal ‬Policies on Economic Growth in Bangladesh‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬. Economics, 5(1), 1-7. https://doi.org/10.11648/j.eco.20160501.11

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    ACS Style

    Md. ‬ Abu Hasan; Md. Ashraful Islam; Md. Abul Hasnat; Md. Abdul Wadud. The Relative Effectiveness of Monetary and Fiscal ‬Policies on Economic Growth in Bangladesh‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬. Economics. 2016, 5(1), 1-7. doi: 10.11648/j.eco.20160501.11

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    AMA Style

    Md. ‬ Abu Hasan, Md. Ashraful Islam, Md. Abul Hasnat, Md. Abdul Wadud. The Relative Effectiveness of Monetary and Fiscal ‬Policies on Economic Growth in Bangladesh‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬. Economics. 2016;5(1):1-7. doi: 10.11648/j.eco.20160501.11

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  • @article{10.11648/j.eco.20160501.11,
      author = {Md. ‬ Abu Hasan and Md. Ashraful Islam and Md. Abul Hasnat and Md. Abdul Wadud},
      title = {The Relative Effectiveness of Monetary and Fiscal ‬Policies on Economic Growth in Bangladesh‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬},
      journal = {Economics},
      volume = {5},
      number = {1},
      pages = {1-7},
      doi = {10.11648/j.eco.20160501.11},
      url = {https://doi.org/10.11648/j.eco.20160501.11},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.eco.20160501.11},
      abstract = {This study explores the relative effectiveness of monetary and fiscal policies on economic growth in Bangladesh for the period from fiscal year 1974 to2015 employing cointegration and Vector Error Correction Model (VECM). We use nominal GDP as a proxy for economic growth, while broad money supply (M2) and reserve money (RM) as proxies for monetary policy. Total government revenue (TR) and total government expenditure (TE) are used as proxies for fiscal policy. The Johansen cointegration tests reveal that monetary policy (M2 and RM) has a greater long run positive impact on economic growth over fiscal policy in Bangladesh. The results of VECM show that there is a weak long run causality running from monetary and fiscal policies to economic growth. VECM also finds that GDP, M2 and TR play a part to adjust any disequilibrium, while TR picks up the disequilibrium rapidly and guides the variables of the system back to equilibrium. VECM Granger causality/block exogeneity Wald test results show that M2 is the leading indicator with respect to economic growth in Bangladesh in the short run. Moreover, economic growth is a leading indicator with respect to fiscal policy in the short run. Thus, we conclude that monetary policy is the more effective channel than fiscal policy to promote economic growth in the short run and long run in Bangladesh.},
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    }
    

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    AU  - Md. ‬ Abu Hasan
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    AB  - This study explores the relative effectiveness of monetary and fiscal policies on economic growth in Bangladesh for the period from fiscal year 1974 to2015 employing cointegration and Vector Error Correction Model (VECM). We use nominal GDP as a proxy for economic growth, while broad money supply (M2) and reserve money (RM) as proxies for monetary policy. Total government revenue (TR) and total government expenditure (TE) are used as proxies for fiscal policy. The Johansen cointegration tests reveal that monetary policy (M2 and RM) has a greater long run positive impact on economic growth over fiscal policy in Bangladesh. The results of VECM show that there is a weak long run causality running from monetary and fiscal policies to economic growth. VECM also finds that GDP, M2 and TR play a part to adjust any disequilibrium, while TR picks up the disequilibrium rapidly and guides the variables of the system back to equilibrium. VECM Granger causality/block exogeneity Wald test results show that M2 is the leading indicator with respect to economic growth in Bangladesh in the short run. Moreover, economic growth is a leading indicator with respect to fiscal policy in the short run. Thus, we conclude that monetary policy is the more effective channel than fiscal policy to promote economic growth in the short run and long run in Bangladesh.
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Author Information
  • Bangladesh Civil Service (General Education), Ministry of Education, Dhaka, Bangladesh

  • Bangladesh Civil Service (General Education), Ministry of Education, Dhaka, Bangladesh

  • Department of Economics, University of Rajshahi, Rajshahi, Bangladesh

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