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Interest Rate Responsiveness of Investment Spending in Bangladesh

Author

Listed:
  • Shamim Ahmed

    (Research Economist, Policy Analysis Unit (PAU), Research Department, Bangladesh Bank, Dhaka, Bangladesh)

  • Md Ezazul Islam

    (Research Economist, Policy Analysis Unit (PAU), Research Department, Bangladesh Bank, Dhaka, Bangladesh)

Abstract

Bangladesh initiated the Financial Sector Reform Programs (FSRPs) at the beginning of the 1990s. One of the objectives of this comprehensive program was to provide better return on deposits and allocate credits efficiently in the financial market by moving towards a market based interest rate regime from an administered interest rate regime, thereby promoting economic growth through increased investment spending. In this connection, the paper empirically investigates whether interest rate liberalization pursued under the FSRP has been able to create a competitive environment in the financial market where investment spending at the aggregate level as well as in disaggregate terms is responsive to the respective lending rates. Using quarterly data set for the period of October-December 1979 to April-June 2005, an assessment of empirical evidence has been established through the unrestricted vector autoregressions (VARs) approach. The results of the empirical analysis suggest that investment spending at the aggregate level is non-responsive to interest rates. Besides, investment spending at the disaggregate level is still not responsive to interest rates except for private sector investment category which is only moderately responsive from the lenders’ point of view in the short-run. These results have important policy implications for both domestic policy makers and the development partners in assessing the achievement of the objectives of the FSRP and taking further policy actions.

Suggested Citation

  • Shamim Ahmed & Md Ezazul Islam, 2004. "Interest Rate Responsiveness of Investment Spending in Bangladesh," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 30(1-2), pages 65-110.
    • Handle: RePEc:ris:badest:0456
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    References listed on IDEAS

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    1. Disyatat, Piti & Vongsinsirikul, Pinnarat, 2003. "Monetary policy and the transmission mechanism in Thailand," Journal of Asian Economics, Elsevier, vol. 14(3), pages 389-418, June.
    2. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
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    Cited by:

    1. Mohammed Saiful Islam & Mohammad T. Uddin, 2020. "Interest Rate Interactions between Bangladesh and the US: Possible Pass Through From the US," International Business Research, Canadian Center of Science and Education, vol. 13(7), pages 1-1, July.
    2. Leandro Medina, 2018. "Assessing Fiscal Risks in Bangladesh," Asian Development Review, MIT Press, vol. 35(1), pages 196-222, March.

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    • A10 - General Economics and Teaching - - General Economics - - - General

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