Volatility in the call money rate and efficacy of monetary policy operations in Bangladesh

This paper examines the pattern of volatility in the call money rate and its association to monetary policy operations of Bangladesh Bank (BB). In the process, it explores empirical issues like the comovement of money market rates and the presence of heteroscedasticity in the call money rate. The first stage analysis supports the view that money market rates co-move and there is a co-integration relationship between overnight money market rate and BB's policy interest rates. At the second stage, long-run properties of the data were incorporated while trying to investigate the efficacy of operational policy of BB in the indirect policy regime by separating the short-run and long-run effects. As the variances of the error terms are not constant, OLS estimation provides a false sense of precision. A GARCH model is therefore estimated which suggests that the operational policy of BB is effective in influencing the rate volatility in Bangladesh. The empirical evidence of this study will assist in better understanding the interest rate channel of monetary transmission, overnight money market behavior, and operational policy of BB.