Abstract

Abstract

This paper aims to estimate a sterilization coefficient to assess the extent to which the Central Bank of Bangladesh (Bangladesh Bank) sterilized capital inflows, and to estimate an offset coefficient to assess the extent to which the central bank’s domestic-market activities spurred additional capital inflows. Monthly data from 2013M1 to 2023M12, available in various government publications, have been used in the analysis. The sterilization coefficient was estimated from the monetary policy reaction function, while the capital flow equation was used to estimate the offset coefficient. Multiple regression was applied to estimate the effects of the explanatory variables. The control variables included are the index of industrial production (IIP), the money multiplier for broad money M2 (MM2), the spread between the central bank policy rate and the effective federal exchange rate (IF), the spread between the policy rate and the call money rate (DS), the nominal USD/BDT exchange rate (NER), and remittances (REM). The results from the two equations across all specifications show that sterilization coefficients are higher than offset coefficients, suggesting that the Central Bank of Bangladesh could mitigate the impact of foreign capital inflows.