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ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
ISSN (Print): 0976-7185; ISSN (Online): 2349-2325 DOI: 10.16962/EAPJFRM/6_3_2
www.elkjournals.com Volume 6 Issue 3, 21-34
21
The Effects of Monetary and Fiscal Policies on Economic Growth in
Bangladesh
Soeb MD. Shoayeb Noman
Senior Lecturer,
School of Business,
Uttara University
MD. Mohsan Khudri
Assistant Professor,
School of Business,
Uttara University
ABSTRACT
Keywords: Economic growth, Fiscal policy, Monetary policy, Trend analysis, Multiple Linear Regression analysis
1. Introduction
Good governance can be determined by the
good political and economic condition of a
country. It is also a part of good human
affairs and the material resources of local
and central government level. Thus the
economic and political structure depends on
each other. The culture of governance is so
much complex as it can change the
economic, political and social aspects of a
country.
The Bangladesh Bank, in
consultation with Finance Ministry,
conducts monetary policy for the nation, and
it has the ability to control the circulation of
money and costs of borrowing money,
known as interest. The Bangladesh Bank
sets the interest rate at which banks borrow
money from them. When the Bangladesh
Bank reduces interest rates, they make it
cheaper for banks to access to money, which
in turn makes banks more likely to give loan
to businesses and consumers.
The study deals with the impact of fiscal and monetary policies on economic growth in Bangladesh. The
data were collected on annual scale from the period of 1979-80 to 2012-13. The study employed line diagram,
correlation matrix, multiple linear regression models and trend analysis on fiscal (i.e., government revenue and
expenditure) and monetary variables (i.e., exchange rate, interest rate, inflation, broad money, and narrow
money). The major objectives of this study are to evaluate the trends in policy variables and examine the impact of
fiscal and monetary instruments on economic growth (RGDP). This study also attempts to make recommendations
based on the research findings. In accordance with the findings narrow money, broad money, exchange rate,
government revenue and expenditure have positive correlation with RGDP indicating that the unit increase in the
abovementioned variables will lead to the unit increase in RGDP. On the contrary, inflation rate and interest rate
on deposit have negative impact on RGDP. The results further revealed that there has been fluctuation in the trend
of interest rate and inflation rate throughout the observed period and a drastic fall has occurred in narrow money
between year 1999-00 and 2001-02. The upward trends have been observed in broad money, exchange rate,
government revenue and expenditure. The results also showed that more than 75% of the total variation of
dependent variable of each model (i.e., model 1, model 2, model 3 and model 4) used in this study is explained by
the explanatory variables of the given model. The study concluded that exchange rate, interest rate, inflation rate,
government revenue and government expenditure are significant variables that affect economic growth in
Bangladesh.
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
22
Our business's ability to borrow or
establish a line of credit can be largely
affected by how expensive or cheap it is for
banks to get money. The primary thing the
central bank of Bangladesh controls is the
interest rate for banks on borrowing money.
Not surprisingly, banks turnaround and pass
the savings or cost to their borrowers. When
the real interest rate is set low for banks,
commercial as well as consumer interest
rates also tend to decrease, making loans
more affordable.
Interest rates and the value of Taka
per dollar have a distinct relationship. When
the Bangladesh Bank makes the cost of
borrowing cheaper, more money starts
flowing in the economy. The more Taka that
are out there, the less each one is worth. The
value of Taka drops. Often, when the
Bangladesh Bank drops interest rates, it
intends to lower the taka's value in order to
make Bangladesh’s goods more affordable,
and therefore, increase Bangladesh’s
exports, which can foster growth in business
and jobs.
During the period of low interest
rates and increased money flowing through
the economy, inflation can occur if
economic production and employment do
not increase. Stagnant business, despite
increased cash, means that more money is
chasing fewer goods and prices rise. One of
the goals of monetary policy is to prevent
excessive inflation while fostering economic
growth.
On the other hand, the central
government, with the help of local
government, conducts the fiscal policy for
the country. As the fiscal policy has two
parts of revenue collection and expenditure,
it largely depends on the political decision
making. Fiscal policy is the most powerful
instruments that the government has to
stabilize the developing economy like
Bangladesh. When the economy is sluggish,
the government may cut taxes, leaving
taxpayer with extra cash to spend and
thereby increasing levels of consumption.
As the fiscal policy has always been
conducted by the central government, it is
central to health of any economy. As the
fiscal policy changes the tax lows and
government expenditures, it can affect
citizens, corporations and business climates
through disposable income. In this regard,
the interrelationship between public
spending and private sector performance is
of prime importance (Ekpo, 2003).
Governments use fiscal policy to
influence the level of aggregate demand in
the economy, in an effort to achieve
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
23
economic objectives of price stability, full
employment, and economic growth.
Government expenditure in recent years has
increased tremendously in attempt to solve
budgetary problems and also accelerate
economic growth.
Traditionally, the economists make
controversy among them about the impact of
fiscal and monetary policy. But the modern
economists believe that both policies have
impact on economic stabilization. On the
other way we can state that both policies
should be implemented simultaneously as
one can complement each other. If the
economy remains below the full
employment level in case of Bangladesh,
both the monetary and fiscal policy can
stimulate economic growth by invigorating
both nominal and real GDP.
The official goals usually include
relatively stable prices and low
unemployment. It is referred to as either
being expansionary or contractionary, where
an expansionary policy increases the total
supply of money in the economy more
rapidly than usual, and contractionary policy
expands the money supply more slowly than
usual or even shrinks it. Expansionary
policy is traditionally used to try to combat
unemployment in a recession by lowering
interest rates in the hope that easy credit will
entice businesses into expanding.
Contractionary policy is intended to slow
inflation in hopes of avoiding the resulting
distortions and deterioration of asset values.
2. Objectives of the Study
There is consensus view of opinion in
literatures as regards impact of fiscal and
monetary policies on economic growth in
developed and developing countries of the
world. In Bangladesh, there is still lack of
empirical studies about the effectiveness of
the fiscal and monetary policies. The main
purpose of this study is to test empirically
the effectiveness of macroeconomic policy
tools. The monetarists believe that the fiscal
policy is ineffective and another group
believes that monetary policy is ineffective
in any economy. The general objective of
the study is to examine the impact of fiscal
and monetary policies on economic growth
in Bangladesh.
Specific objectives of this study are
to determine the trend in monetary
and fiscal instrument over the years
(1979-80 to 2011-12);
to examine the impact of monetary
and fiscal policies on gross domestic
product being a proxy for economic
growth in Bangladesh; and
to make recommendations based on
research findings to enhance
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
24
economic growth and development
in Bangladesh.
3. Statement of Hypothesis
Ho: Fiscal and monetary policies have no
impact on economic growth of Bangladesh.
H1: Fiscal and monetary policy have a
significant impact on the economy of
Bangladesh.
4. Significance of the Study
The study is very relevant as it will
empirically show the impact of fiscal and
monetary policies on economic growth in
Bangladesh. However it is important to
study the effect of the two policies to ensure
the growth of real gross domestic product
(RGDP). Thus, the purpose of this study is
to fill the gap by testing the effectiveness of
two policy variables on RGDP in the case of
less developed country like Bangladesh.
This will also help the government to
establish policy mix to boost economic
growth and development.
5. Empirical Review
Monetary policy and fiscal policy are two
policy variables that are often used to
accelerate the economic growth. According
to the need of the central government,
Bangladesh Bank conducts monetary policy
to control money supply and the rate of
interest. Under the Financial Sector Reform
Programs (FSRP) in 1990s the legal,
institutional and policy frameworks have
been changed significantly (Bangladesh
Bank, 2009).
Ahmed and Islam (2004) mentioned
about the changes in the financial system of
Bangladesh under the reforms programs.
This reform ensures that Bangladesh Bank
can use both the market based instruments
and direct instruments to conduct monetary
policy and achieve their goal of stable price
and control financial intermediaries.
Therefore, with a view to making and
implementing smooth monetary policy the
central bank need to understand the distinct
active channels of monetary transmission
mechanisms in the economy of Bangladesh
(Ahmed and Islam, 2004).
It is widely accepted that the main
objective of monetary policy is to make the
price of an economy stable. Nowadays, the
central bank like Banco de Mexico has
changed their monetary policy objectives, by
setting price stability as their main goal
targeting low-level inflation (Banco de
Mexico, 2012). In a market economy, no
one can set the market price directly because
it has been determined by the market
mechanism of demand and supply. But the
central bank can influence the price-
determination process by using the monetary
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
25
policy and thus accomplish its inflation
target (Banco de Mexico, 2012).
Most empirical analyses are limited
to simple linear regressions of growth on
government revenues and expenditures.
Although the extensive variety of possible
theoretical relationships among government
revenues (taxation and other sources),
expenditures, and economic growth. Many
researchers performed a systematic
comparative analysis (both theoretically and
empirically) of the various economic
insights (fiscal policy, investments and
economic growth, etc) that were currently
available. Based on empirical experiments,
they indicated directions for future empirical
research that may enrich our knowledge on
the complex relationship between fiscal
policies and economic growth (Brons et al.,
1999).
Baum and Koester (2011) analyzed
quarterly German data from 1976 to 2009 by
threshold SVAR, expanding the SVAR
approach developed by Blanchard and
Perotti (2002). The threshold model gave
new idea about the impacts of fiscal shocks
on economic stability. Changing the time,
size and direction of the shocks may alter
the impacts of shocks. When there is
negative output gap the fiscal spending
multipliers are more effective than when
there is positive output gap. But
discretionary revenue policies have
generally more limited impacts on fiscal
shocks (Baum and Koester, 2011).
6. Methodology
The area of study is Bangladesh. The
sources of data were mainly from secondary
sources. We collected data from two
sources: (1) Monthly Economic Trend
published by Bangladesh Bank and (2)
Economy watch
(www.economywatch.com). Time series
data spinning from 1979-80 to 2012-13 were
gathered on seven independent variables
namely exchange rate, interest rate on
deposit, inflation rate, broad money, narrow
money, government revenue and
government expenditure and one dependent
variable which is gross domestic product.
6.1. Analytical Techniques
Different types of descriptive and inferential
statistical techniques adopted in this study
are narrated below:
6.1.1. Trend Analysis
This involves using line diagrams to show
the trends in all macro-economic variables,
i.e., exchange rate, interest rate, inflation
rate, narrow money, broad money,
government revenue, and government
expenditure). This technique fits a trend line
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
26
to a series of historical data points and
projects the line into the future for medium
to long-range forecasts. The method we
have applied here is the least squares
method which results in a straight line that
minimizes the sum of the squares of the
vertical differences or deviations from the
line to each of the actual observations. The
trend equation can be expressed as follows:
ŷ𝑡 = 𝑎 + 𝑏𝑥 (1)
Where, ŷ is a computed value of the variable
to be predicted (i.e., dependent variable) and
x is the independent variable (which in this
case is time).
a = y-axis intercept
b = slope of the trend line (i.e., the rate of
change in y for given change in x)
x = time (i.e., the independent variable)
6.1.2. Correlation Coefficient
With a view to identifying the linear
relationship between macroeconomic
variables, we have used the following
formula:
rxy = ∑ (xi−x)(yi−y)n
i=1
(n−1)sxsy=
∑ (xi−x)(yi−y)n
i=1
√∑ (xi−x)2 ∑ (yi−y)2ni=1
ni=1
(2)
6.1.3. Model specification
Our empirical model has been specified in
the following manner:
𝑦𝑡 = 𝑓 (𝑀𝑃𝑡 , 𝐹𝑃𝑡) (3)
Where, Y is a measure of economic activity
in which Gross Domestic Product (GDP) is
employed as a proxy, MP and FP are
measures of monetary and fiscal actions of
the government respectively.
Exchange Rate, interest Rate,
inflation, narrow money (M1) and broad
money (M2) are employed as proxies for
monetary policy variables while the fiscal
variables are government revenue and
government expenditure. The subscript (t)
means time period. The models are
explicitly specified as:
Model 1
RGDP = β0+ β1M1+ β2M2+β3ER+ β4INT+
β5INF (4)
Model 2
RGDP = α0+ α1GREV+ α2GEXP (5)
Model 3
RGDP = γ0 + γ1M1 + γ2M2 + γ3ER + γ4INT +
γ5INF + γ6GREV + γ7GEXP + Et (6)
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
27
Model 4
RGDP = τ0 + τ1ΣMV + τ2ΣFV (7)
Where,
Et = Error term
β0 β1 β2 β3 β4 and β5 are the coefficients of
the independent variable
RGDP = Real gross domestic product
(billion)
M1 = Narrow money supply (million)
M2 = Broad money supply (million)
ER = Exchange Rate (against USD) (Period
average)
INT = Interest rate (%) (Weighted average)
INF = Inflation rate (%) (Period average)
GREV = Government revenue (billion)
GEXP = Government expenditure (billion)
ΣMV = Sum of all monetary variables
ΣFV = Sum of all fiscal variables
The model was estimated using
Ordinary Least Square techniques (OLS). It
was subjected to a dynamic estimation using
the lag structure of the variables. There will
be determination of the existence of
substantial co-movements among time series
variables. The reason for this is that when
the dependent and independent variables
have unit roots, traditional estimation
method, using observations on levels of
those variables would likely find a
statistically significant relationship even
when meaningful “economic” linkage is
absent (Akinlo and Odusola, 2003).
7. Results and Discussions
7.1. Trend Analysis
Figure 1(a) shows the inflationary trend. In
1979-80, the inflation rate was very high,
after 1983-84 it remains stable then tends to
fall in mid 1990s. It increased in 1999-2000
and fell back in 2001-02; it rose steadily
after 2001-02.
Figure 1(b) shows the movement of
interest rate over the period 1979-80 to
2012-13. Over the period the interest rate
remains between 4% and 9%. In 1991-92 it
was high and dropped to 4% in 1995-96.
After 2009-10 it rose gradually till 2012-13.
We all know that there is a direct
relationship between interest rate and saving
and an inverse relationship between
investment and interest rate; which may be
the cause of such stable fluctuations.
Figure 1(c) shows trend in Exchange
rate of Bangladeshi taka to US dollar. We
can clearly see from the figure that the
exchange rate increases steadily over time
starting from 15 taka per USD in 1979-80 to
78 taka per USD in 2012-13. One of the
probable reasons behind this may be the
government is trying to control the exchange
rate to boost up the confidence of the
exporters in Bangladesh.
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
28
Figure 1(d) shows that there has been
a continuous increase in the supply of
currency with non-bank and demand deposit
between the periods of 1979-80 and 2012-13
except in 2001-02 when the supply of
money had been reduced sharply by the
government. The reason for sharp decline
may be controlling the inflationary pressure.
Figure 1(e) shows that amount of
money and liquidity in the economy
continues to increase from 1979-80 to 2012-
13. Figure 1(f) shows that government
revenue continues to increase from 1979-80
till 2012-13. Figure 1(g) shows that the
government expenditure continues to
increase from 1979-80 to 2012-13. Figure
1(h) shows that although there are larger
hikes in 1985-86 and 1991-92 but the
growth in RGDP remains stable from 1979-
80 to 2012-13. The projected figures of all
the macroeconomic variables have been
showed in two phases, namely 5 years
(2016-17) and ten years (2022-23). All the
estimates except for inflation rate and
interest rate on deposit are showing
significant upward trend (Insert Table 1
here)
7.2. Correlation Matrix
This shows the linear relationship between
RGDP and other variables (i.e., exchange
rate, interest rate, inflation, M1, M2,
government revenue and government
expenditure).
(Insert Table 2 here)
The results of Table 2 disclose that RGDP
has strong positive correlation with GREV,
GEXP, M2 and ER which refer to strong
influence of each of the aforementioned
variables on RGDP. On the contrary, there
exists a weak negative correlation between
RGDP and IR. The thing goes same between
RGDP and INF. These indicate both of these
variables have negative impact on RGDP. In
addition, it is found that the linear
relationship between RGDP and M1 is weak
in positive direction.
7.3. Multiple Linear Regression Models
7.3.1. RGDP and Monetary Instruments
The result reveals that there is inverse
relationship between economic growth and
interest rate & inflation, whereas there is a
positive relationship between economic
growth and other variables (exchange rate,
M1 and M2). Thus, exchange rate, M1, M2,
growth will increase RGDP while holding
interest rate and inflation constant, but the
reverse is the case for interest rate &
inflation, when exchange rate, M1 and M2
are held constant. The t-statistics show the
significant relationship between RGDP and
the estimated macroeconomic variables. R-
square value shows that 79% of total
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
29
variation in GDP is being explained by the
explanatory variables. F-statistics value of
739.519. Only exchange rate and interest
rate are showing significant on the GDP.
Summary of regression results:
Model 1
RGDP = 483.768 + 0.001M1+ 0.000M2+ 45.896ER – 175.615INT – 2.130INF (8)
(1.689) (2.587) (6.491) (12.321) (-6.885) (-0.200)
R-square = 0.79 (79.0%)
F-statistic = 739.519 (Significant at 0.000)
D.W= 1.518
Figures in parentheses are values of t-statistic
7.3.2. RGDP and Fiscal Policy
The result shows the positive relationship
between economic growth and Government
revenue and a negative relationship between
economic growth and government
expenditure. The co-efficient of
determination, R-square reveals that 82% of
the variations in RGDP are being explained
by government revenue and government
expenditure. The f-statistics also shows that
the model is statistically significant.
However, the model also revealed positive
serial correlation as shown in the value of
Durbin Watson test of 0.202.
Summary of regression results:
Model 2
RGDP = 643.595 + 5.936GREV – 1.916GEXP (9)
(4.778) (1.509) (-0.630)
R-square = 0.82 (82.0%)
F-statistic = 70.705 (Significant at 0.000)
D.W=0.202
7.3.3. RGDP, Monetary and Fiscal
Policies
This model examined the relationship
between GDP and the fiscal and monetary
policies in Bangladesh. The result shows
that M1, M2, ER, revenue and expenditure
have positive relation with RGDP, while
other variables (INF and INT) have negative
relationship with GDP. The R-square shows
that 76% of the variation in GDP is ascribed
to joint consideration of all variables of the
two sectors. The F-statistic indicates that the
specified model is significant. The series
possess a level of positive autocorrelation as
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
30
the Durbin Watson test shows that the value
is approximately 1.486, which is less than 2.
Summary of regression results:
Model 3
RGDP = 475.871 + 0.001M1 + 0.000M2 + 45.655ER – 175.433INT – 1.757INF + 0.078GREV
+ 0.147GEXP
(1.522) (2.312) (0.811) (11.169) (-6.572) (-0.147) (0.068) (0.133) (10)
R-squared = 0.760 (76.0%)
F-statistic = 380.163 (Significant at 0.000)
D.W = 1.486
7.3.4. RGDP, Sum of Monetary Variables
and Sum of Fiscal Variables
This model examined the relationship
between GDP and the sum of fiscal and
monetary variables in Bangladesh. The
result shows that MV have negative and FV
have positive relation on GDP. The R-
square shows that 83.3% of the variation in
GDP is attributed to joint consideration of
the sum of variables of the two sectors. This
implies that a unit increase in the number of
independent variables will lead to a unit
increase in GDP. While the f-statistics
indicates that the specified model is
statistically significant. The series possess
positive serial correlation (autocorrelation)
as the Durbin Watson test shows that the
value is approximately 0.425, which is less
than 2.
Summary of regression results:
Model 4
RGDP = 381.802 - 0.002ΣMV+ 4.7257ΣFV (11)
(2.023) (-1.922) (2.815)
R-square = 0.833 (83.3%)
F-statistic = 77.185 (Significant at 0.000)
D.W = 0.425
8. Summary of Findings
The study focuses on the impact of
monetary and fiscal policies of Bangladesh.
These have been evaluated by addressing
some critical hypotheses of these
instruments on the economy. The study has
been able to find out that there has been
fluctuation in the trend of policy variables in
Bangladesh considered with reference to the
year 1979-80 to 2012-13. The result of
regression shows that 99.0% of the
variations (model 1) in the dependent
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
31
variable had been explained by the
explanatory variables. In model 2, 82.0% of
the variations in dependent variable were
explained by the explanatory variable while
99.0% of the total variation has been
explained by the explanatory variables
(model 3) and 83.3% of the variations in the
dependent variable of model 4 had been
explained by the explanatory variables as
indicated above. The result further shows
that narrow money, broad money, exchange
rate, and government revenue and
government expenditure have positive
relationship with RGDP which shows that a
unit increase in those variables will lead to a
unit increase in GDP. Inflation and interest
rate have negative impact on GDP, and
significant at 1% probability level. Thus,
these variables contribute to economic
growth.
9. Conclusions
Keynesian economics suggests that
increasing government spending and
decreasing tax rates are the best ways to
stimulate aggregate demand, and decreasing
spending & increasing taxes after the
economic boom begins. Keynesians argue
this method to be used in times of recession
or low economic activity as an essential tool
for building the framework for strong
economic growth and working towards full
employment.
The research study examined the impact of
fiscal and monetary policies on economic
growth of Bangladesh to the period of 1979-
80 to 2012-13. The study concluded that
exchange rate, interest rate, inflation rate,
government revenue and government
expenditure are significant policy variables
that affect economic growth in Bangladesh
(i.e., using Real Gross Domestic Product as
proxy for economic growth). The study
therefore opined and recommends that in
order to put Bangladesh economy on the
path of sustainable growth and development;
the government must put emphasis on its
fiscal and monetary policies with the
cooperation of Bangladesh Bank in order to
enhance the welfare of their citizen.
10. References
[1] Ahmed, S. and Islam, M.E. (2004). The
Monetary transmission Mechanism in
Bangladesh: Bank Lending and
exchange Rate Channels. The
Bangladesh Development Studies, 30
(3&4), 31-87.
[2] Akinlo, A.E. and Odusola, A.T. (2003).
Assessing the impact of Nigeria’s naira
depreciation on output and inflation.
Applied Economics, 35(6), 691-703, doi:
10.1080/0003684032000056823.
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
32
[3] Banco de Mexico (2012). The Effects of
Monetary Policy on the Economy.
[4] Baum, A. and Koester, G.B. (2011). The
impact of fiscal policy on economic
activity over the business cycle –
evidence from a threshold VAR analysis.
Discussion Paper Series 1: Economic
Studies, Deutsche Bundesbank, No 03.
[5] Blanchard, O. and Perotti, R. (2002). An
Empirical Characterization of the
Dynamic Effects of Changes in
Government Spending and Taxes on
Output. Quarterly Journal of Economics
117(4), 1329-1368, doi:
10.1162/003355302320935043.
[6] Brons, M., Groot, H.L.F. and Nijkamp,
P. (1999). Growth Effects of Fiscal
Policies: A Comparative Analysis in a
Multi-Country Context. Tinbergen
Institute Discussion Papers. Number 99-
042/3, June.
[7] Bangladesh Bank (2009). Monetary
Policy Review, October 2005-July 2009.
[8] Ekpo, A. (2003). The Macroeconomic
Policy Framework: Issues and
Challenges. Central Bank of Nigeria 3rd
Annual Monetary Policy Conference
Proceedings on Issues in Fiscal
Management: Implications for Monetary
Policy in Nigeria, Central Bank of
Nigeria Publications, Lagos.
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
33
List of Figures
Figure 1(a): Trend in inflation rate
Figure 1(b): Trend in rate of interest (deposit)
Figure 1(c): Trend in exchange rate (ER)
Figure 1(d): Trend in narrow money (M1)
Figure 1(e): Trend in broad money (M2)
Figure 1(f): Trend in government revenue
Figure 1(g): Trend in government expenditure Figure 1(h): Trend in RGDP
05
101520
19
79
-80
19
85
-86
19
91
-92
19
97
-98
20
03
-04
20
09
-10
Infl
ati
on
ra
te
(Per
iod
Av
era
ge)
Year
Period avg0
5
10
19
79
-80
19
85
-86
19
91
-92
19
97
-98
20
03
-04
20
09
-10
Ra
te o
f Ii
nte
rest
(Wei
gh
ted
av
era
ge)
Year
ROI (WA)
0.000020.000040.000060.000080.0000
100.0000
19
79
-80
19
88
-89
19
97
-98
20
06
-07
Per
iod
a
ver
ag
e o
f
ER
(U
SD
)
Year
Period avg0
100000
200000
300000
19
79
-80
19
85
-86
19
91
-92
19
97
-98
20
03
-04
20
09
-10
M1
(BD
T i
n b
illi
on
)Year
BDT inMillion
02000000400000060000008000000
19
79
-80
19
86
-87
19
93
-94
20
00
-01
20
07
-08
M2
(BD
T i
n b
illi
on)
Year
M2 (BDT inMillion)
0
500
1000
15001
97
9-8
0
19
85
-86
19
91
-92
19
97
-98
20
03
-04
20
09
-10
Rev
enu
e (B
DT
in
Bil
lio
n)
Year
Revenue(BDT inBillion)
0
500
1000
1500
2000
19
79
-80
19
86
-87
19
93
-94
20
00
-01
20
07
-08
Exp
end
itu
re (
BD
T i
n
Bil
lio
n)
Year
Expendtiture (BDT inBillion)
010002000300040005000
19
79
-80
19
85
-86
19
91
-92
19
97
-98
20
03
-04
20
09
-10
GD
P a
t C
on
sta
nt
pri
ce
(BD
T i
n B
illi
on)
Year
Gdp-Constant(BDT inBillion)
ELK Asia Pacific Journal of Finance and Risk Management Article # 4325/EAPJFRM (2015)
34
List of Tables
Table 1: Trend equations and predicted values of the macroeconomic variables
Table 2: Correlation matrix of macroeconomic variables
GREV GEXP M2 IR INF M1 ER
RGDP .904 .898 .881 -.381 -.390 .339 .981
Macroeconomic Variables Trend Equation Estimates
2016-17 2022-23
Gross Domestic Product (GDP) GDP = −548.875 + 130.179𝑥 4528.11 5179.01
Narrow Money (M1) ��1 = 47783.231 + 2223.465𝑥 134498.37 145615.69
Broad Money (M2) 𝑀2 = −.00011 + 129852.293𝑥 5064239.43 5713500.89
Exchange Rate (ER) ER = 13.635 + 1.853𝑥 85.9 95.17
Interest Rate (IR) INT = 8.001 − 0.041𝑥 6.4 6.2
Inflation Rate (INF) INF = 10.795 − 0.176𝑥 3.93 3.06
Government Revenue (GREV) GR = −203.018 + 29.531𝑥 948.69 1096.35
Government Expenditure (GEXP) GE = −257.845 + 37.904𝑥 1220.41 1409.93
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