The Relative Effectiveness of Monetary and Fiscal ‬Policies on Economic Growth in Bangladesh‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬
Volume 5, Issue 1, February 2016, Pages: 1-7
Received: Jan. 7, 2016; Accepted: Jan. 15, 2016; Published: Jan. 31, 2016
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Md. ‬ Abu Hasan, Bangladesh Civil Service (General Education), Ministry of Education, Dhaka, Bangladesh
Md. Ashraful Islam, Bangladesh Civil Service (General Education), Ministry of Education, Dhaka, Bangladesh
Md. Abul Hasnat, Bangladesh Civil Service (General Education), Ministry of Education, Dhaka, Bangladesh
Md. Abdul Wadud, Department of Economics, University of Rajshahi, Rajshahi, Bangladesh
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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.
Economic Growth, Monetary Policy, Fiscal Policy, Cointegration, Causality
To cite this article
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. Vol. 5, No. 1, 2016, pp. 1-7. doi: 10.11648/
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