Academy of Accounting and Financial Studies Journal Volume 22, Number 1, 2018

TESTING TAYLOR’S RULE TO EXAMINE MONETARY

POLICY REGARDING BANK RATE, INFLATION AND
OUTPUT GAP OF BANGLADESH: 1972-2016
Nurul Mohammad Zayed, Daffodil International University
ABSTRACT

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.

Keywords: Taylor’s Rule, GMM Method, Monetary Policy, Stability, Bank Rate, Output Gap,
Bangladesh Bank.

INTRODUCTION

Monetary policy is a macroeconomic policy that is used to achieve macroeconomic goals

such as consumption, liquidity, growth and inflation by the country’s government. Bangladesh
bank is currently following a price targeting based monetary policy and it will be continued up to
FY18. Bangladesh bank is prioritizing in building up strong capabilities in forecasting and
eradicating impediments to financial pricing which is market based. Current monetary policy of
Bangladesh is supporting manufacturing which is employment-focused, green project sub sectors
and FDI facilitation. According to Bangladesh bank’s monetary program, growth ceiling of
Domestic Credit (DC) is consistent with inflation and growth objectives. Bangladesh bank is
ready for adjustments in rate of policy. There is robustness in the momentum of output growth
followed by uptrend in food price. Global inflation may cause mitigation in the risk of domestic
inflation. According to Bangladesh bank, monetary aggregates enhancing smoothly within the
growth ceiling though domestic credit and inflation are remaining below the ceiling (Monetary
Policy Statement, BB, 2017).
The prominent Stanford economist, John Taylor invented and published Taylor’s rule
from 1992-1993. Taylor’s rule is the form that shows how nominal interest rate which is set by
government changes in output gap, inflation and other economic variables. It’s a forecasting
model which is used to determine the shifts of interest rate in the economy. Taylor’s rule
recommends that central banks should increase interest rates when employment surpasses full
employment level or inflation is high. Conversely, interest rates must be decreased while
employment levels and inflation are low. According to Taylor’s rule, policymakers should not
follow algebraic formulations. Policy performances are generally improved by credible and
systematic features of rules. A new policy would do better when the existing policy is not doing
well. According to Taylor’s rule, if inflation rises above 2% of target or real GDP increases over
trend GDP then the rate of federal funds also rises. The coefficients of the rules are used to make

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easy discussions. The rate of federal funds is influenced by the changes in real GDP and inflation
and those emerged from updated research. Taylor’s rule is based on interest rate (short term), full
employment and inflation. Taylor’s rule indicates that, the central bank should adjust the
nominal interest rate in response to deviations of inflation from target and output from potential.
On the other hand, it reduces interest rates to stimulate output (Taylor, 1993).
The objective of this paper is to analyze the monetary policy of Bangladesh during 1972-
2016 in terms of bank rate, inflation rate and output gap in accordance with the Taylor’s rule.
Moreover, this research intends to estimate whether the monetary policy of Bangladesh is
following the Taylor’s rule and whether there is any long run relationships among bank rate,
inflation rate and output gap of Bangladesh over the period 1972-2016.
There were few previous studies regarding monetary policy of Bangladesh to be
examined to find out the gaps, differences and motivations of this study on Taylor’s rule. There
is an association between inflation and domestic borrowing in Bangladesh and Bangladesh is
affected by double-digit inflation which is resulted from the borrowing of the government of
Bangladesh (Islam & Kabir, 2012). Because of positive association between policy shock and
output, monetary policy of Bangladesh is playing a significant role in macroeconomic stability
(Younus, 2017). Monetary policy was affecting financial stability and real economy of
Bangladesh through changes in policy stance, asset prices and bank lending (Rafiq, 2015).
Developed countries rather than developing countries follow rule based monetary policy such as
Taylor’s rule (Islam, 2009). To reduce poverty and to accelerate growth, Bangladesh bank should
undertake inflation targeting framework to achieve output growth and price stability (Islam &
Uddin, 2011). Lending rate, deposit rate, real GDP, output, inflation, money supply and interest
rate are the most significant variables to foster the monetary policy in Bangladesh during 2006-
2016 (Younus & Roy, 2016). The previous studies lack behind from considering or applying
Taylor’s rule to examine the monetary policy of Bangladesh. Besides as Bangladesh bank adopts
short term interest rate to conduct its monetary policy, Taylor’s rule should be examined and
that’s how it motivated to conduct and choose this study.
The rest of the paper is structured as follows. Section 2 describes a brief review of the
relevant literature. Section 3 depicts a theoretical model that captures the Taylor’s rule. The
econometric estimations for the long run relationship among the variables are set out in Section
4. Section 5 concludes with some concluding remarks.

LITERATURE REVIEW

The rationale for this research study is to examine monetary policy of Bangladesh during
1972-2016 in accordance with Taylor’s rule. To focus in this topic, to show critical analysis
among the different previous works and to relate these researches to this research, several
relevant studies have been examined. For better understanding and analysis, these studies have
been classified by papers for developed economies, emerging economies and Bangladesh
economy.

Developed Economies

Mehra & Minton (2007) tested Taylor’s rule to examine whether interest rate is
determining monetary policy actions in USA and found that inflation estimates the output gap
very well in the context of Greenspan Fed by using real time data and by developing a forward-
looking model. Farrell (2015) inferred New Zealand, Canada and Australia in terms of policy

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preferences of central banks regarding inflation by using small Keynesian open economy model
and Bayesian estimation and found that the monetary policy is optimal according to Taylor’s rule
and from the point of view of central banks. Berument (1999) assessed that both inflation and
interest rates affect Treasury-bill rate in UK over the period 1958-1994 within the framework of
Fisher hypothesis by applying ARCH and GARCH models and found that there is a long run
relationship among expected inflation, inflation risk and the t-bill rate in UK. Nikolov (2002)
explained why monetary policy rules of Bank of England and found that it uses an inflation
targeted triangular rule and also explained that how policy rules are been used as the input of
regular assessment under different assumptions by using the Taylor’s rule, Barinard rule and
McCallum rule and by applying MPC methods over the period 1993-2001. Bouchabchoub,
Bendahmane, Haouriqui & Attou (2015) presented monetary policy on the basis of Taylor’s rule
in the context of European Central Bank and found that interest rate, inflation and GDP could be
predicted by applying Taylor’s rule, Hall-Taylor equation, Kalman filter & Hodrick-Prescott
model with reference to 2001-2009 and found inflation shock on interest rates.
Sauer & Strum (2003) suggested that in terms of inflation ECB is accommodating
changes and following a destabilizing policy by applying Taylor’s rule & HP filtered method
with reference to 1991-2003 and found a partial adjustment by a large degree in interest rates.
Clarida, Gali & Gertler (1998) estimated monetary policy reaction for countries such as UK,
Germany, Japan, US, Italy and France by applying GMM method with reference to 1974-1994
and found that the central banks of these aforesaid countries respond to expected inflation rather
than lagged inflation, inflation rate is superior to exchange rate in fixing monetary policy and
interest rate is much higher than that of other macroeconomic variables. Rzhevskyy & Papell
(2012) estimated Taylor’s rule for US monetary policy with reference to 1966-1979 and found
that Taylor’s rule is not being following by Fed and also monetary policy does not stabilize
inflation rate. Kozicki (1999) focused on the monetary policy in the light of Taylor’s rule and
suggested that there is no robustness in rules to minor variations, policy decisions made by
policy makers are also limited, in special circumstances Taylor’s rule has disadvantages in
Kansas City, Missouri with reference to 1960-1997. Sghaier (2013) estimated monetary policy of
CBT by applying PP test, LM test and GMM method of estimation with reference to 1993-2011
and found that CBT follows Taylor rule and the primary objective of monetary policy is
inflation. Woodford (2001) incorporated inflation, output gap and nominal interest rate regarding
monetary policy according to Taylor’s rule and suggested a realistic model of output gap that
may be quite different from theoretical measures which should be based on interest rate. Asso,
Kahn & Lesson (2010) applied VAR model and found the optimization problem regarding
adjusting policy rates at central banks by the policymakers and also suggested that Taylor rule
must be incorporated with the macroeconomic models to forecast the economy.

Emerging Economies

Moreira (2015) investigated monetary policy of Brazil and found that the monetary
policy of Brazil is different from Taylor’s rule by estimating OLS and GMM over the period of
2005-2013. It showed no robust effects of inflationary expectations and suggested to stabilize
output against the stabilization of inflation. Onanuga, Tella & Osoba (2016) investigated
monetary policy rate regarding output gap uncertainty in Nigeria with reference to 1991-2014 by
using Taylor’s rule, ADF test, KPSS test, GARCH model, ARCH model, Breusch-Pagan-
Godfrey test, GMM method and Weak instrument test and found no strong evidence of
supporting the case that monetary policy is affected by inflation and also found that real output

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gap has less influence on monetary policy and hence suggested that both inflation and output gap
should be considered by the Central Bank of Nigeria while setting policy rate. Pinga & Xiongb
(2003) examined monetary policy of China by applying GMM estimation with reference to
1992-2001 and found that the monetary policy of China is unstable and suggested that China
should implement interest rate reform to change the regime of monetary policy. Kim (2013)
assessed the monetary policy regarding interest rate, inflation rate and government spending of
Korea with reference to 2000-2012 by applying Bayesian techniques, Random Walk Markov
chain Monte Carlo method, Hessian likelihood and Simulated Annealing method and found that
the monetary policy of Korea was countercyclical and inflationary, output growth volatility was
reducing and suggested that an aggressive monetary policy would stabilize the inflation rate but
at the cost of higher output growth volatility. Boamah (2012) used time series data of Ghana
regarding inflation, GDP and output gap with reference to 1993-2011 by applying HP filtered
test and ECM test and found that as interest rate predictor Taylor rule doesn’t work in Ghana.
Guney (2016) investigated monetary policy rules of Turkey regarding inflation and output gap
with reference to 2002-2014 by using Taylor’s rule, Hodrick-Prescott (HP) model, ADF test,
GMM method, Hansen’s J-test and found that CRBT is concerned about price stability and
responded to growth uncertainties and inflation.

Bangladesh Economy

Islam & Kabir (2012) investigated whether there is any association between government
domestic borrowing and inflation in Bangladesh and found that Bangladesh is affected by
double-digit inflation that is resulted from government borrowing by running a regression
analysis. It was suggested that Bangladesh bank should implement contradictory monetary policy
for the effective prevention of runaway inflation. Younus (2017) developed a DSGE model to
estimate and analyze policy shocks regarding reaction function of central bank of Bangladesh
with reference to output and inflation by using Bayesian estimation over the period 1991-2014
and found that there is a significant role of monetary policy in macroeconomic stability in
Bangladesh as there exists a positive association between output and policy shock in Bangladesh.
Rafiq (2015) explored how real economy and financial stability of Bangladesh are affected by
monetary policy over the period 2003-2013 by applying MCMC methods and Gibbs sampling
estimation and found that monetary policy affects real economy and inflation through bank
lending, asset prices, changes policy stance and finally suggested policy measures that would
enhance and promote monetary policy and financial stability of Bangladesh respectively. Islam
(2009) examined the strategies of monetary policy of 6 countries like Bangladesh, USA, India,
UK, Pakistan and Sweden and found that developed countries follow monetary policy which is
rule based, on the other hands developing countries launch policies rather than following policies
by applying Taylor’s rule, Rudebusch-Svensson model and Hodrick-Prescott model over the
period 1984-2008 from the normative counterpart. Islam & Uddin (2011) found that Bangladesh
bank has sophistication undertaking framework of inflation targeting which could have been
helped to achieve price stability and output growth as the objectives of Bangladesh are to
accelerate growth and reduction of poverty.
Younus & Roy (2016) forecasted inflation, output and the policy rate for the period July
2016-June 2017 in Bangladesh with reference to 2006-2016 by applying ADF test, PP test, KPSS
test and VAR analysis and found that interest rate and money supply are the two most significant
variables in Bangladesh to forecast output and inflation and also concluded that to ensure potent
management of real GDP growth and inflation in Bangladesh, the spread between lending rate

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and deposit rate could be used by the monetary authority of Bangladesh. To apply the Taylor’s
rule, nominal interest rate, inflation rate and output gap must be incorporated. But one cannot
ignore bank rate as it is one of the major policy tools of monetary policy. The literature review
on the Taylor’s rule is bold but it lacks considering developing countries like Bangladesh. So, to
fill up these gaps, this study considered bank rate instead of nominal interest rate of Bangladesh
and estimated the structural stability of the model by applying CUSUM & CUSUMQ tests unlike
the previous studies.

OBJECTIVES

The objective of this research is to analyze the influences of the bank rate on inflation
rate and output gap in Bangladesh during 1972-2016 by applying OLS and GMM methods in
accordance with Taylor’s rule. The specific objectives of this paper are to explain the effects in
the relationships among bank rate, inflation rate and output gap, to estimate how bank rate
responds to changes in inflation rate and output gap, to evaluate the stability of Taylor’s rule in
Bangladesh during the period 1972-2016 and to recommend monetary policy guidelines to
improve the imbalance of money supply in Bangladesh.

METHODOLOGY

This research is descriptive in nature and the data is quantitative in nature. Only the
secondary data were used. Time sample data were collected from the world development
indicators report, internal database and websites from 1972-2016. An OLS model among the
variables such as bank rate, inflation and output gap has been developed which is specified in
Equation (2) and OLS and GMM methods have been applied. ADF test, PP test and KPSS test
have been applied to test the stationary state of time series data. Cumulative sum (CUSUM) and
cumulative sum of squares (CUSUMQ) of recursive tests have been applied to examine the
stability of Taylor’s rule.

Theory & Model

Monetary policy is the mechanism by which central banks control the money supply to
achieve price stability by targeting interest rate and inflations rate. The Central Bank undertakes
such a monetary policy in accordance with Taylor’s rule where interest rate is a function of
inflation deviations and output. Rules of monetary policy are changing and flexible over time
according to the preferences of different countries and interest rate lies on information dynamics
due to inflationary process and that is the ultimate goal of Central Banks (Moreira, 2015). The
most significant issue of monetary policy concerns with strategy setting of Central Banks’ policy
instruments. In general, short term interest rate is considered for implementing monetary policy
as the key instrument of inflationary dynamics and output regarding target and potential levels
(Taylor, 1993).
Taylor’s rule actually explains the influence of inflation rate on the nominal interest rate
that changed by central banks. The output and demand dynamics are explained by IS curve as
output gap (yt - yt) depends on past value and short term interest rate with constant variance and
zero mean (Moreira, 2015). The Taylor’s rule is as follows:

it = β0 + β1(πt – 0.02) + β2(yt - yt) (1)

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Where it, β0, β1, πt, 0.02, β2, (yt - yt), yt,and yt denote nominal interest rate, benchmark
recommendations targeting inflation and interest, coefficient of inflation gap, inflation rate, 2%
inflation target, coefficient of output gap, output gap, log of real GDP and log of potential output
respectively (Taylor, 1993). Here β0, β1 and β2 are positive parameters. Inflation (πt) is cause by
lagged output gap (yt - yt) and its past values with constant variance and zero mean (Moreira,
2015). In accordance with Taylor’s rule, an OLS model has been developed under the symmetry
condition among bank rate, inflation rate and output gap of Bangladesh during the period 1972-
2016 and the model and instrument rule is as follows:-

it = α + β0 + β1πt + β2ogt + ϵt (2)

Where it, α, β0, β1, πt, β2, ogt and ϵt denote bank rate, alpha coefficient, benchmark
recommendations targeting inflation and interest, coefficient of inflation, inflation rate,
coefficient of output gap, output gap and error term respectively. Here β0, β1 and β2 are positive
parameters. The equilibrium bank rate is quoted by it, inflation target is quoted by πt and ϵt is the
shock of policy innovation in inertial rule. This model has the nature of forward-looking where
bank rate (it) is defined by its past values by policymakers to avoid frequent reversions and
abrupt movements. Here past bank rate is determining current bank rate. Authorities’ decisions
are affected by public’s expectations. To explain the price stability forward-looking rule has been
adopted as it’s significant to describe the behavior of bank rate as the implicit or explicit target of
Central Bank. The equations (1) & (2) are presented in real terms for bank rate (it), inflation (πt)
& output gap (ogt). The output gap (yt - yt) has been measured by deducting actual output or GDP
(yt) from potential output or GDP (yt). The real term Taylor rule has been defined for the
economic openness of Bangladesh by taking output gap in to consideration. The alpha coefficient
(α) explains the sensibility of bank rate (it) to output gap (ogt). Because of countercyclical
behavior of monetary policy, α is >0. When α>1 the bank rate (it) increases response to increase
of inflation deviation (πt) (Moreira, 2015).

Econometric Estimations

Augmented Dicky Fuller (ADF), Phillips-Perron (PP) and KPSS tests have been applied
to test integration order and the stationary state of the variables in first step. From Table 1, it
appears that bank rate (i) and inflation rate (π) are stationary at level, I (0); on the other hand
output gap (og) is stationary at 1st difference, I (1).
Table 1
ADF, PP AND KPSS UNIT ROOT TESTS (STATISTICS)
ADF1 PP2 KPSS ADF3 PP4 KPSS
st
Series Level test 1 Difference test I(n)
i -2.5185*** -1.9256* 0.2592*** - - - I(0)
*
π -3.1861 -3.1832 0.0797 - - - I(0)
og -1.6509* -8.3097* 0.2333 -6.6290*** -24.8290*** 0.3856*** I(1)

Note: (1) Only significant constant for i and π; (2) none significant component for i and only constant for π; (3)
none for i and π and only constant for og; (4) none for i and π and only constant for og. Statistical significance at 10
%(*), 5 %(**) and 1 %(***)
Source: Estimated (i=Bank Rate, π=Inflation Rate & og=Output Gap)

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Co-integration methods are not justified as the time series or data jointly are not I (1).
Hence OLS and GMM should be adopted with bank rate (i) and inflation rate (π) at level, I (0),
while output gap (og) at first difference, I (1) in a dynamic estimation of short term. So, to
estimate Taylor’s rule for the Bangladesh economy, this study implemented such methods. To
correct endogeneity, residual autocorrelation and heteroskedasticity, GMM method is applied.
For the sake of robustness, the results of GMM regressions could be compared with the findings
of OLS. The instrumental variables must be exogenous for testing GMM (Moreira, 2015). From
Figure 1, the visual plots of the variables appeared which are properly glued.

INF OG
.20 .16

.15 .14

.12
.10

.10
.05
.08

.00
.06

-.05
.04

-.10 .02
5 10 15 20 25 30 35 40 45 I 5 10 15 20 25 30 35 40 45

.20

.16

.12

.08

.04

.00
5 10 15 20 25 30 35 40 45

Source: Estimated (I=Bank Rate, INF=Inflation Rate & OG=Output Gap)

FIGURE 1
PROPERTIES OF THE VARIABLES

The specifications could be observed in Table 2 through OLS estimates. The adjusted R2
is above 0.3. The Newey and West (1987) estimator has been used to estimate OLS which is in
line for correcting residual autocorrelation, suggested by LM test regarding the specifications.
The coefficient of inflation (0.456088) is significance at 1% which means that there is a high
degree of gradualism in inflation rate to adjust bank rate. All the generated estimates and
estimated values are away from excess unity as far as forward-looking coefficients are
concerned. In this regard, such policy is not consistent with bank rate in terms of counter cyclical

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movements. The value of output gap (-1.013960) is negative and it’s not statistically significance
meaning that Bangladesh Bank reacts to output gap changes pro-cyclically (Moreira, 2015).
Table 2
OLS-NEW & WEST ESTIMATES (1972-2016)
OLS-NW Estimates
Explanatory Variables
Eq.2
0.109861
C (0.020146)
[5.453109]
0.456088***
π (-1) (0.137520)
[3.316514]
-1.013960
og(-1) (0.292759)
[-3.463465]
Adjusted R-squared 0.354037
F-statistic 13.05770
Prob(F-statistic) 0.000039
LM (Prob:02 lags) 0.0000

Note: () denotes standard error and [] denotes t-statistic, ***denotes statistical significance at 1%, **
at 5% and *at
10%
Source: Estimated (π=Inflation Rate, og=Output Gap & C=Constant)

Bangladesh Bank has a preference for stimulating output in Bangladesh, to trade- off
inflation-output stabilization. The monetary policy of Bangladesh demonstrates output
preference, which is in line with bank rate’s pro-cyclical reaction. So, Bangladesh bank has not
taken pass-through effect significantly into account regarding bank rate decision during the
analyzed period. If Bangladesh Bank shows any change in monetary policy, the response should
be the downward bank rate in Bangladesh (Moreira, 2015).

Table 3
GMM ESTIMATES (1972-2016)
GMM Estimation
Explanatory Variables
Eq.2
-0.799834*
C (2.471403)
[-0.323636]
-0.213905***
π (-1) (3.391275)
[-0.063075]
17.36224*
og (-1) (51.45598)
[0.337419]
Adjusted R-squared -39.439994
J-stat 1.38E-43
(J-Prob) 0.2252

Note: The instrumental variables were π (-1) and og (-1); () denotes standard error and [] denotes t-statistic,
***
denotes statistical significance at 1%, **at 5% and *at 10%
Source: Estimated (π=Inflation Rate, og=Output Gap & C=Constant)

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30

20

10

-10

-20
5 10 15 20 25 30 35 40 45

CUSUM 5% Significance

Source: Estimated
FIGURE 2
CUSUM STATISTIC

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4
5 10 15 20 25 30 35 40 45

CUSUM of Squares 5% Significance

Source: Estimated

FIGURE 3
CUSUMQ STATISTIC

The GMM estimations of monetary policy are shown in Table 3. The coefficients
maintained statistical significance and confirming previous estimates of OLS and also
corroborating Bangladesh Bank’s gradualism of high degree. Values of GMM estimates
regarding inflation are less meaning that the monetary policy of Bangladesh is not counter-
cyclical. The coefficient of output gap is significance and positive that reinforces the monetary
policy of Bangladesh (Moreira, 2015).

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The GMM estimates are just opposite of OLS estimates in terms of the coefficients of
inflation and output gap that are not consistent with pass-through and counter-cyclical effects.
These findings denote that Bangladesh Bank preferred downward bank rate during the analyzed
period to offset downward movement of output of Bangladesh. The model maintained a high
level of adjusted R2 and the null hypothesis has not been rejected by J-statistics. Thus the OLS
and GMM estimates identify divergence from Taylor’s rule in the monetary policy of
Bangladesh. Moreover, there is pro-cyclical bias of Bangladesh Bank in terms of the responses to
inflation and output gap thus making inconsistent monetary policy (Moreira, 2015).
From Figures 2 and 3, it appears that bank rate function of Bangladesh was not stable
during 1972-2016. CUSUM and CUSUMSQ plots must be under 5% critical bounds if the
coefficients were to be stable but in this research the plots of CUSUM and CUSUMQ both
crossed the bounds.

SUMMARY OF FINDINGS

There exists a relationship among bank rate, inflation rate and output gap of Bangladesh
during 1972-2016. If bank rate goes up, output gap also goes up. QUSUM and QUSUMQ tests
suggested that the model is not stable. During the analyzed period, bank rate is aligned and
consistent with output gap but not with inflation rate of Bangladesh according to economic
theory. Bank rate is working as the policy tool only for the output gap not for the inflation rate. It
could be concluded that monetary policy is not been implemented in line of Taylor’s rule in
Bangladesh meaning that monetary policy is not appropriate to achieve the macroeconomic goals
as far as inflation rate of Bangladesh is concerned during the analyzed period.

CONCLUSION AND POLICY SUGGESTIONS

Generally when bank rate is higher there is less borrowing, less investment, less growth,
less spending and hence inflation rate decreases and output gap increases because of less
investment. It means with the incremental bank rate, the money supply is also increasing in the
economy but investment is not up to the mark and that’s why output gap and inflation rate is also
increasing rather than decreasing in the economy of Bangladesh during 1972-2016. In this
situation real estate market, gold market, stock market and consumer goods market are also being
affected by the incremental inflation rate. Though high cost of import is the major reason of
inflation, the incremental trend of inflation is mostly driven by the less investment despite of
incremental money supply in the economy of Bangladesh. The ratio of money supply and
investment is low during the analyzed period in Bangladesh. Bangladesh Bank should implement
such a monetary policy where bank rate will be used as a moderate policy tool so that there are
sufficient amount of money supply in the economy to boost up the production or investment and
could control the inflation rate as well.

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