The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper explores how monetary policy affects the real economy and its efficacy in promoting
financial stability in a large low income country. This paper shows that monetary policy
modestly impacts real economic activity and inflation via the bank lending and financial
accelerator channels. Second, money market and treasury rates signal changes in the policy
stance, while altering banks' intermediation cost curves due to shifting risk premia. At the same
time, evidence points to monetary policy inducing an overshooting in asset prices. These findings
suggest that financial stability could be undermined if the calibration of monetary policy is based
solely on output and inflation without accounting for the stage of the financial cycle. Finally, the
paper discusses policy measures that would enhance the transmission of monetary policy and
promote financial stability in Bangladesh.