Output Decomposition and the Monetary Policy Transmission Mechanism in Bangladesh: A Vector Autoregressive Approach

This paper investigates the output composition of the monetary policy transmission mechanism for Bangladesh. Vector Auto-regression (VAR) models are used to analyse the data from 1973 to 2015. Although the central bank’s policy interest rate shock does not significantly affect the major compositions of the output, investment channel still works better than consumption. However, exchange rate shock effects more significantly on the real economy mainly through consumption than investment. This research, on one hand, demonstrates the potential channels of the monetary policy transmission mechanism. On the other hand, methodologically, it proposes a minor modified model that suite for economy of the developing countries like Bangladesh where the net export component of output is negative which creates some complexity in using the standard model used for developed countries like the USA, the EU, Japan and Australia.