Publications

Regime-Dependent Monetary Policy Transmission

and Yield Curve Dynamics in Bangladesh:

Evidence from a Markov-Switching Vector

Autoregression.

Abstract

   This study examines the transmission of monetary policy shocks to the sovereign yield curve in Bangladesh across different macroeconomic regimes, using a two-state Markov-Switching vector autoregression (MS-VAR) model estimated from monthly data between April 2015 and January 2026. The model infers a Stable regime (covering about 81% of the sample) and a Volatile regime associated with periods of financial stress and policy uncertainty. Regime-specific impulse response functions show that a one-standard-deviation shock to the policy rate generates substantially larger and more persistent yield-curve adjustments in the Volatile regime. In particular, the 5-year yield rises by up to 11.8 basis points at a one-month horizon in the Volatile regime, compared with almost zero in the stable regime. Forecast error variance decomposition indicates that the policy rate explains nearly 70% of its own forecast error variance in the volatile regime but has a minimal effect in the stable regime, where movements in the yield curve are largely driven by short-rate shocks. The transition matrix shows that the stable regime is highly persistent, with an average duration of 7.4 months, compared with 1.7 months for the Volatile regime. These findings have important implications for the communication policy of  Bangladesh Bank and bond investors in frontier markets.

 Keywords: Markov-switching VAR, yield curve, regime change, frontier markets, monetary policy transmission, Bangladesh, impulse response.

JEL Classification: C32, E43, E52, G12. 

Publication Status: Submitted