Interest Rate Instability and Macroeconomic Environment in Bangladesh: Some Links and Policies

Abstract

Significant economic shocks are dispersed and financial policies are greatly impacted by interest rate volatility. This study uses monthly data from January 2011 to March 2017 to examine the behavior of several interest rates in Bangladesh's economy, including loan, deposit, call money, and T-bill. The results of our step-by-step regression analysis show that: (a) the instability of T-bill rates, deposit rates, and money supply has a significant impact on the instability of lending rates; (b) the instability of T-bill rates is significantly impacted by the instability of deposit rates, call money rates, lending rates, and monthly exports; and (c) the instability of T-bill rates and money supply has a significant impact on the instability of call money rates. We also apply a vector auto-regressive (VAR) framework to investigate the time-based causal linkages among these variables. Policymakers can manage the oscillations of the T-bill rate in order to regulate the variations of the call money rate, as the former has a major beneficial impact on the latter. The call money rate's volatility is significantly impacted negatively by the money supply.