Analyzing the Trend of Private Sector Credit in Bangladesh: Do Loose Monetary Policy and GDP Growth Matter?

Authors/ Publisher: Mintu Barua

Abstract:

Abstract

This study tries to explore the influence of monetary expansion and GDP growth on the private sector credit in Bangladesh in the framework of Auto Regressive Distributed Lag (ARDL) bound testing technique by utilizing the annual time series data for the period of 1980 to 2019. The long-run estimates of ARDL model reveals that although monetary expansion enhances the private sector credit flow, economic growth has very negligible influence on the flow of domestic credit to the private sector due to corruption, political intervention and structural weakness of financial sector in Bangladesh. Granger causality test also confirms the success of loose monetary policy in credit expansion. Finally, it is worthy to be mentioned that a loose monetary policy is inevitable for an unwavering private sector credit flow, well-being of infant industry, enhancing the investment activities and thereby strengthening the capital formation in Bangladesh. This study calls for adopting the reformation of central bank, money market, policy rate, formal and informal agencies of credit distribution as well as confirming an investment friendly environment which motivate the private sector credit flow and lead Bangladesh to reach its highest possible stage of success.