Recent Monetary Policy Statement of Bangladesh Bank (July 2009): An Analytical Commentary

Monetary policy is the process by which the central bank of a country controls the supply of money,
the availability of money, and the cost of money or rate of interest, in order to attain a set of
objectives oriented towards the growth and stability of the economy. Fiscal policy induced “demand
management” approach as propagated by Keynes, which was popular in the post-Great Depression
period, later made way to monetary policy led “stabilisation” approach in the period of high inflation
of 1970s. While traditional fiscal policy solutions were useful in confronting unemployment by
increasing spending and cutting taxes, counter-acting inflation entailed reducing spending or raising
taxes.
The growing importance of monetary policy and the diminishing role played by fiscal policy in
economic stabilisation efforts may reflect both political and economic realities. Monetary and fiscal
policies differ in the speed with which each takes effect as the time lags are variable. Monetary
policy is flexible (rates can be changed each month) and emergency rate changes can be made,
whereas changes in taxation take longer to organize and implement. Also, considerable time may
pass between the decision to adopt a government spending programme and its implementation.