He was replaced by a MIT graduate and noted Princeton Professor Ben Bernanke, who is well known among the academia for his seminal research on monetary economics. I had the opportunity to observe how the Fed steered the economy after 9-11, when the ongoing recession was further strengthened by the newly resulted shock in consumer confidence among all American. Neither economists nor politicians spare any opportunity to idolize Alan Greenspan for the success of the Fed to steer the economy in the right track since he took over.

But the Fed was not always successful. Apart from the great depression, the Fed's failure was also obvious during the time of the double-digit inflation of early 1970s. The whole Volcker regime as the chairman of the Fed is identified as a period of failure. During the same time, the banking and financial sector of the US was also under some control. Through passing the Banking Act of 1933, congress empowered the Fed to control over the interest rates that a commercial bank can offer to the depositors. The Fed exercised this power immediately, and the policy on deposit interest rate ceiling over the next 53 years is known as Regulation Q. Small savings institutions were exempted from this regulation. The objective of Regulation Q was to help the small savings institutions to collect more savings as they cannot compete with the big commercial banks. By collecting more deposits, savings institutions could loan it to the local communities.

The implementation of Regulation Q varied in different periods. During 1933 through 1965, the ceiling on the interest rates on deposits were above the interest rates on 3-month Treasury bill in all but a few months, and average interest rates paid by commercial banks on all savings deposits were below the lowest ceiling rate in effect. Therefore, Regulation Q was ineffective. But during 1966 through 1986, (Regulation Q was finally phased out in 1986), the 3-month Treasury bill rate was much higher than the ceiling on the deposit interest rate. As a result, the commercial banks lost huge amount of deposits to the treasury bills. In fact, some research shows that such disintermediation was a significant contributor to the commercial bank failure in the US.

Like any other economic policy, monetary intervention implemented by the central bank cannot work in vacuum. The outcome of the monetary policy does not depend only on the policy input, but also on the transmission channel through which the changes in the monetary stances of the central bank transmit into the real sector. The most important channel is the bank lending channel. With the changes in the monetary stance of the central bank, the interest rate on deposits and loan as determined by the commercial banks will change. So the total deposit that a commercial bank can collect will change, which in turn will affect its ability to loan and the loan based consumption and investment demand. This is the main way the central bank can steer the economy through the desired way.

But if the interest rate is arbitrarily determined and remains unresponsive to the change in the monetary stance, this bank lending channel will not work, and the central bank will be doomed to failure. This is exactly what happened during 1966 through 1986 in the US. The commercial banking system was indirectly controlled and was not responsive to the monetary stance of the Fed. With the phasing out of Regulation Q, monetary transmission channel in the US has become stronger. Emerging research is now showing that it was not only the "good monetary policy" but also a regulation free commercial banking system that contributed to the success of the Fed during the Greenspan regime.

The market interest rates in Bangladesh are still controlled. Such control weakens the channel to transmit the effects of changes in monetary stances of the Bangladesh Bank into the real sector. In an environment like that, there is nothing left for Bangladesh Bank to accomplish. The autonomy of Bangladesh is a much talked about issue in Bangladesh. But what can even a fully autonomous Bangladesh Bank can do if there is no strong transmission channel?

A common perception about the central bank is that its sole responsibility is to implement appropriate monetary policy to promote economic growth and control inflation, and the political interest of the government does not allow the central bank to do that. The criticism of the politicization of the operation of the central bank is not unique only to Bangladesh. It is everywhere in developing countries. The immediate and long run effect of a monetary action varies. A policy may provide apparently positive result in the short run, which may reverse in the long run. The clever politicians make the best use of this to get reelected to the power in absence of the autonomy of the central bank. Government directs the central bank to implement a policy that will give some short run positive results before the election. So the voters are happy. By the time those ephemeral positive effects turn into adverse effects, election is over and the government gets reelected. This is known as political business cycle in economics. The existence political business cycle justifies the demand for the autonomy of the Bangladesh Bank.

But implementing the right monetary policy is not the only task of the central bank. Another important responsibility is to generate and collect macroeconomic, particularly monetary, data. To implement the right monetary policy, central bank has to correctly forecast the future dynamics of the economy, and data are required for carrying out such research. Here lies the importance of the capability of the Bangladesh Bank to generate data and carry out research. Needless to mention how deficient is Bangladesh Bank to perform this responsibility. The job in the research wing of any branch of the Federal Reserve System (there are 12 branches) is one of the best academic job in the US. The Fed always gets the best students of the best universities, if not the very best universities, like Harvard or MIT. But this is not the fortune of the Bangladesh Bank. The full autonomy of the Bangladesh Bank, without being well equipped to generate information and carry out research will not bring any qualitative change in its activity.

Probably, the highest number of research papers on monetary policy in the US comes from the research wings of the Fed, but Bangladesh Bank is totally unproductive. One very basic prerequisite for the design of an appropriate policy is to know the responsiveness of the economy to that policy. For example, if the Bangladesh Bank wants to achieve a target output by changing the interest rate, then it has to know what will be change in output if the interest rate is increased/decreased by one percent. This is what the economist calls elasticity. Bangladesh Bank does not have a precise estimate of such elasticity yet, then what good does the autonomy bring to it?

Bangladesh Bank does not have to shoulder all responsibilities. Given the constraints as they stand now, it should aim to achieve the capability to generate the monetary data, and make them public. Then the scholars in Bangladesh and abroad can do research from which the country will be benefited. If the new governor can build the capacity to generate the quarterly monetary and macro data, there are many scholars out there to do research on monetary policy on Bangladesh economy. Bangladesh Bank should not shrug off this responsibility just for not having autonomy.

Md. Abul Basher is a PhD student, University of Washington, USA.