Monetary and Fiscal Impacts on Economic Activity in Bangladesh: A Note

Abstract

In recent years the relative effectiveness of monetary and fiscal policy actions on economic stabilization has been debated by both economists and policymakers. In case of USA, empirical studies using a reduced form 'St. Louis equation5 has shown that monetary actions have a greater impact on economic activity than fiscal actions (see, for example Andersen, Leonall and Carlson 1970 ; Carlson 1970 ; Hafer 1982). On the other hand, structural models such as the FRB-MIT model suggest that fiscal, rather than monetary, actions exert the dominant influence on economic activities in USA (see, for example deLeeuw and Kalchbrenner 1969). Batten and Hafer (1983) and Dewald and Marchon (1978) have also discussed the relative effectiveness of the two stabilization policies in other developed countries. However, the results from these studies cannot be generalized for the developing countries since they have significanty different economic and political structures. There has been very few, if any, empirical studies regarding the relative efficacy of the stabilization tools in these countries, The purpose of this note is to test the comparative effectiveness of the two policy variables in, case of a developing economy like Bangladesh. Bangladesh represents an open econmy with a large non-monetized sector. Although the monetary management decisions are taken by the Bangladesh Bank yet, unlike many developing countries, the Bank is directly controlled by the Government. The fiscal decisions are also unilaterally taken by the executive branch of the government with little or no input from the legislature.

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