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Inflationary expectations and monetary policy: evidence from Bangladesh

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  • Rokon Bhuiyan

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    Abstract

    This article first estimates inflationary expectations using a Blanchard–Quah VAR model by decomposing the nominal interest rate into expected inflation and the ex ante real interest rate. Then I utilize this expected inflation along with other macroeconomic variables as inputs to the monetary policy function in a recursive VAR model to identify exogenous policy shocks. To calculate inflationary expectations, I assume that ex ante real interest rate shocks do not have a long-run effect on the nominal interest rate. This article finds that the public expects lower inflation for the future during periods of high inflation. Estimated results from the recursive VAR suggest that a contractionary policy shock increases the real interest rate, appreciates domestic currency, and lowers inflationary expectations and industrial output. However, I find a lagged policy response from Bangladesh Bank to higher inflationary expectations. Copyright Springer-Verlag 2013

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    Bibliographic Info

    Article provided by Springer in its journal Empirical Economics.

    Volume (Year): 44 (2013)
    Issue (Month): 3 (June)
    Pages: 1155-1169

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    Handle: RePEc:spr:empeco:v:44:y:2013:i:3:p:1155-1169

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    Related research

    Keywords: Monetary policy; Expected inflation; Structural VAR; Impulse response; C32; E43; E58;

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