Inflationary expectations and monetary policy: evidence from Bangladesh
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
Volume (Year): 44 (2013)
Issue (Month): 3 (June)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/econometrics/journal/181/PS2|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kahn, Michael & Kandel, Shmuel & Sarig, Oded, 2002. "Real and nominal effects of central bank monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1493-1519, November.
- Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
- Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
- Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
- Abdur Chowdhury & Minh Dao & Abu Wahid, 1995. "Monetary policy, output and inflation in Bangladesh: a dynamic analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 2(3), pages 51-55.
- Søren Johansen & Katarina Juselius, 1992.
"Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model,"
92-04, University of Copenhagen. Department of Economics.
- Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
- Kandel, Shmuel & Ofer, Aharon R & Sarig, Oded, 1996.
" Real Interest Rates and Inflation: An Ex-Ante Empirical Analysis,"
Journal of Finance,
American Finance Association, vol. 51(1), pages 205-25, March.
- Shmuel Kandel & Aharon R. Ofer & Oded Sarig, . "Real Interest Rates and Inflation: An Ex-Ante Empirical Analysis," Rodney L. White Center for Financial Research Working Papers 2-95, Wharton School Rodney L. White Center for Financial Research.
- Shmuel Kandel & Aharon R. Ofer & Sarig & Oded, . "Real Interest Rates and Inflation: An Ex-Ante Empirical Analysis," Rodney L. White Center for Financial Research Working Papers 02-95, Wharton School Rodney L. White Center for Financial Research.
- Engle, Robert & Granger, Clive, 2015.
"Co-integration and error correction: Representation, estimation, and testing,"
Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Jumah, Adusei & Kunst, Robert M., 2002. "On Mean Reversion in Real Interest Rates: An Application of Threshold Cointegtation," Economics Series 109, Institute for Advanced Studies.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- Sims, Christopher A., 1992.
"Interpreting the macroeconomic time series facts : The effects of monetary policy,"
European Economic Review,
Elsevier, vol. 36(5), pages 975-1000, June.
- Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
- Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
- Rokon Bhuiyan & Robert F. Lucas, 2007. "Real and nominal effects of monetary policy shocks," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 679-702, May.
- 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).
- Prasad V. Bidarkota, 2003. "Do Fluctuations in U.S. Inflation Rates Reflect Infrequent Large Shocks or Frequent Small Shocks?," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 765-771, August.
When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:44:y:2013:i:3:p:1155-1169. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.