The role of financial development and monetary policy on sector-wise of economic growth in Bangladesh

Abstract

This dissertation examines how development of financial sector and monetary policy instruments affect sector-wise growth rates of the economy. The main intuition behind the dissertation is that if the responses in the three major sectors (agriculture, industry and services) of an economy are found to be heterogeneous, it is worthwhile to determine the impact of financial developments on each sector of the Bangladesh economy individually. Therefore, the research objectives of the thesis are (i) to examine the link between financial development and economic growth in Bangladesh; (ii) to analyse the relationship between sector-wise financial development and sector-wise economic growth in Bangladesh; and (iii) to investigate the effects of monetary policy on sector-wise economic growth of Bangladesh. The study uses the macro level quarterly data for the period 1980Q1-2016Q2. The full sample period of about 36 years is divided into two subsamples (1980Q1-1990Q4 and 1991Q1-2016Q2) to investigate the structural changes in the economy after financial liberalisation took place in early 1990s. The study employs autoregressive distributed lag (ARDL) and structural vector auto regression (SVAR) models for econometric specification and analysis. The dissertation, overall, in aggregated levels, finds that real domestic credit has significant impact on real GDP both in the long run and short run during full sample and sub-sample periods. However, the real lending rate is found to be statistically significant only for the first sub-sample period (1980Q1-1990Q4) in the long run. On the disaggregated levels, overall, in the long run, the research finds that while agriculture and services sectors are significantly positively responsive to the shocks of real domestic credit, industry sector is not found to be positively responsive for the first sub-sample period (1980Q1-1990Q4). On the other hand, the short run stability estimates at the disaggregated levels find mixed results of responsiveness that varied between different sample periods. The thesis concludes that the monetary policy and external sector variables have an impact on sector-wise economic growth but varied between sectors at different sample periods both in the long run and short run. Therefore, this dissertation suggests that regulatory authorities and policymakers should think of appropriate policy measures customized to sector-specific issues rather than a single policy for all sectors because the response of each sector against a shock in financial development varies across different sectors.