Testing Taylor Rule to Examine Monetary Policy Regarding Bank Rate, Inflation and Output Gap of Bangladesh: 1972-2016
This paper examined monetary policy of Bangladesh regarding bank rate, inflation rate and output gap during 1972-2016 in accordance with Taylor's rule. ADF test, PP test, KPSS test, OLS method, GMM method, CUSUM test and CUSUMQ test have been applied to test the relationship among the variables and to test the stability of the OLS model. It was found that there existed a relationship among the variables and Taylor's rule was not applicable during the analyzed period. Bangladesh bank needs to implement a moderate monetary policy with the aid of bank rate as the major policy tool, so that output gap and inflation rate both are decreased by maintaining the money supply in Bangladesh economy.