Impacts of Monetary and Fiscal Policies on Price and Currency Stability in Bangladesh

Abstract

This study investigates the effect of monetary and fiscal policies on inflation and exchange rate in Bangladesh in light of recent high inflation and the currency crisis. The analyses employ data from 1991 to 2022 to examine the ability of monetary and fiscal policies to stabilize the economy by managing inflation and currency fluctuations. The ARDL bounds test approach is utilized to estimate the empirical relationships of the model specification from both monetarist and Keynesian perspectives. The study’s findings reveal that monetary and fiscal policies significantly impact inflation management, with monetary policy playing a more substantial role. The empirical relationship emphasizes that an increase in money supply and government spending positively affect inflation, with money supply having a greater impact on controlling domestic prices. Nevertheless, the study does not provide evidence that monetary and fiscal policies significantly influence exchange rate stabilization. The research indicates that enhancing the export sector, raising the amount of remittance inflows, reducing import reliance by promoting domestic production, prioritizing the reduction of fiscal reliance on monetary policy, and implementing a market-oriented exchange rate mechanism can aid in maintaining economic stability in terms of prices and currency. These outcomes provide valuable insight into the effectiveness of monetary and fiscal policies in stabilizing the economy and offer relevant policy implications for policymakers in Bangladesh.