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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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    File URL: http://hdl.handle.net/10.1007/s00181-012-0595-z
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    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
    Contact details of provider: Web page: http://www.springer.com

    Order Information: Web: http://www.springer.com/economics/econometrics/journal/181/PS2

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

    Find related papers by JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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    14. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
    15. Gottschalk, Jan, 2001. "Measuring Expected Inflation and the Ex-Ante Real Interest Rate in the Euro Area Using Structural Vector Autoregressions," Kiel Working Papers 1067, Kiel Institute for the World Economy (IfW).
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