Abstracts This paper investigates the determinants of FDI inflows in Bangladesh, concentrating on the effects of monetary policies.

Economic literature suggests that monetary policy factors can exert positive effect on foreign direct investment (FDI) inflows. The main focus of this study is to examine the role of such factors on FDI inflows in Bangladesh over the period of 20 years since 1993-2013. Linear regression analysis was done on economic data, collected from Bangladesh Bank library, to determine the relationship between FDI inflows, Inflation, exchange rate, Foreign exchange reserve, monetary base, interest rate and credit to private sector. This research found that among factors that are expected to have a more visible relationship with FDI, interest rate had a negative impact explaining the investors preference towards moving in the country where they might borrow at relatively lower interest rate. The exchange rate had a positive impact which represents the tendency towards gaining the locational advantage arising out of currency devaluation. The impact of inflation was debatable as it didnt illustrate the expected inverse relationship with FDI. On the other hand, factors like FX reserve, M0 and private sector credit that are expected to induce FDI indirectly through their impacts on investment, aggregate demand and supply; all were positively related with FDI.

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1.1 ORIGIN Of THE RESEARCH PAPER

This research paper is basically deal with on Impact of monetary policy on FDI as a partial fulfillment of the requirement of MBA Degree from the Department of finance, Faculty of Business Studies, University of Dhaka. In this paper we have tried best to describe almost all of the important issues related to my assigned above topic.

1.2 OBJECTIVE OF THE RESEARCH PAPER

The objective of this research is to have a better understanding of the relationship between FDI and different monetary policy components. This research will examine six variables, namely Inflation, exchange rate, Foreign exchange reserve, monetary base, interest rate and credit to private sector, that influence the level of FDI Bangladesh.While higher FDI inflow is one of the determinants responsible foreconomic growth, this research will use empirical data to examine whether higher FDI inflow can be induced by these variables. We aim to test whether any relationship exists between FDI inflow into a country and the countrys monetary policy impacts regarding its exchange rate, inflation rate, interest rate, FX reserve, M0 and private sector credits.This research serves to provide a better understanding in the role monetary policy plays in the growth of FDI inflow in an emerging economy.

1.3 RESEARCH DESIGN Data Collection

This study is basically based on secondary data. The data have been collected from website of World Bank & Economic Review of Bangladesh from 1993 to 2013. Here we have taken six monetary variables such as Monetary Base (MB0), Private Credit, Forex Reserve, Foreign Exchange rate, Inflation rate & Interest rate. As a key element of monetary policy, here we try to examine where these variables have any relationship with Foreign Direct Investment (FDI). Total number of observations is 20. Here, 20 years of data have been chosen based on the data availability.

Data Design
By using Secondary sources, data from 1993-2013 are utilized for analysis the relationship between FDI (Dependent Variable) and Independent Variables- Monetary Base, Interest Rate, Inflation, Credit to Private and Foreign exchange Reserve. Statistical Tools 1. Run Simple Regression between FDI and Independent Variables- Monetary Base, Interest Rate, Inflation, Credit to Private and Foreign exchange Reserve separately by using excel. 2. Use Strata to see Multi-co linearity problem among the independent variables. Run Multiple Regression between FDI and Independent Variables- Monetary Base, Interest Rate, Inflation, Credit to Private and Foreign exchange Reserve separately by using Strata.

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Model Specification The output of the data runs through Simple & Multiple Regression Model in stata11& Micrsoft Excel. The reason behind using this model is that monetary policy tools varible can affect FDI two way: sepearately and as a whole. The P & P>|t| value determines which explanatory variables are significant at 5% significance level. Focused Variables
1. Dependent Variable - FDI 2. Independent Variables Monetary Base (MB), Private Credit, inflation, interest rate, forex reserve, foreign exchange rate.

Model Design FDI= ( MB, Private Sector Credit, Inflation, Interest Rate, Exchange rate, FX reserve) 1.4 LIMITATIONS
1. The most elementary limitation of this paper is that there lack of proper data sources and proper base of data. 2. Lack of experience also acted as constraints in the way of exploration on the topic. 3. This type of paper requires a lot of technical knowledge which is also a major limitation of this report.

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Foreign direct investment (FDI) is a major component of capital flow for emerging markets. Its contribution towards economic growth is widely argued, but most researchers concur that the benefits outweigh its cost on the economy. FDI embodies a package of potential growth, enhancing attributes, such as technology and access to international market. But the host country must satisfy certain preconditions in order to absorb and retain these benefits, and not all emerging markets possess such qualities.Various studies have been done on determining factors that influence FDI inflow into a host country. Some are economic factors such as the target countrys market size, income level, market growth rate, inflation rates and current account positions, while others are socio-economic determinants namely political stability and quality of infrastructure. Monetary policy can shape the economic environment that is conducive in attracting FDI into host countries. However the characteristics of monetary policy presents the impossible trinity a trilemma problem where trade-offs must be done in order to maintain economic stability. Two of these anchors are inflation and exchange rate variability. These trade-offs can impact on the host countrys attractiveness on FDI inflow. The objective of this research is to have a better understanding of the relationship between FDI and different monetary policy components. This research will examine six variables, namely Inflation, exchange rate, Foreign exchange reserve, monetary base, interest rate and credit to private sector, that influence the level of FDI Bangladesh.While higher FDI inflow is one of the determinants responsible foreconomic growth, this research will use empirical data to examine whether higher FDI inflow can be induced by these variables. We aim to test whether any relationship exists between FDI inflow into a country and the countrys monetary policy impacts regarding its exchange rate, inflation rate, interest rate, FX reserve, M0 and private sector credits.This research serves to provide a better understanding in the role monetary policy plays in the growth of FDI inflow in an emerging economy.

2.1 REVIEW OF FDI AND MONETARY POLICY OF BANGLADESH

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy. It can also be defined as the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves). The official goals usually include relatively stable prices and low unemployment.There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements.The other primary means of conducting monetary policy include: (i) Discount window lending (lender of last resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion (cajoling certain market players to achieve specified outcomes); (iv) "Open Mouth Operations" (talking monetary policy with the market). Bangladesh Bank has long been publishing monetary policy statement. Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS) outlines the monetary policy stance that BB will pursue, based on an assessment of global and domestic macro-economic conditions and outlook. The MPS is usually preceded 4|P a ge

by productive consultations with a range of key stakeholders and web-based comments were also received. BB try to intensify its focus on improving the transmission of monetary policy by strengthening market mechanisms and a key area is strengthening secondary market trading in government securities. Measures taken to this end include enhancing the shorter-dated portion of bills/bonds issues, where there is greater investor appetite, and launching an electronic trading window on BBs website. Financial sector stability is also important for effective monetary policy. Recent measures include tightening loan classification and provisioning requirements towards convergence with global best practices, introducing online supervisory reporting requirements on financial transactions and strengthening onsite and offsite vigilance. Various measures to detect fraud have been implemented. BB has strengthened its supervision capacity as well as reiterated the role that bank boards and management play in this regard. Bangladesh is one of the top five recipients of foreign direct investment (FDI) in 2012, according to the recent report of the FDI Intelligence, which monitors global inflow of FDI regularly. Bangladesh got the 3rd position with an increase of 33.33 per cent of FDI inflow in the past eight months to August 2012 when it was 109.09 per cent in Angola and 36.36 per cent in Macedonia. According to the World Investment Report (WIR), 2012 of the United Nations Conference on Trade and Development (UNCTAD), Bangladesh received FDI of $1.13 billion in 2011, the highest ever investment from overseas. The previous record amount of FDI was $1.08 billion in 2008 with increased flow of investment in the country's fast growing telecommunication sector. The flow of FDI totals at USD 603.3 million, USD 563.93 million and USD 803.78 million in FY 199798, FY 2001-02 and FY 2004-05 respectively. After FY 2004-05, the flow of FDI declined in the next three fiscal years. The country received an increased amount of USD 960 .59 million in FY 2008-09 but witnessed a fall in FDI inflow in next fiscal years.

FDI(US $ Milllion)
1600 1400 1200 1000 800 600 400 200 0 2004-05
1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

FDI

FDI

Figure1.1: FDI from fiscal year 1993 to 2013.

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2.2 LITERATURE REVIEW FDI & Exchange Rate

In the past, economists believed that there is no advantage to be gained by purchasing foreign capital and/or assets. As the economic system works in a long-term equilibrium, any firm purchasing foreign assets at a bargain, in the hope of taking advantage of stronger currency in their home country against the targeted country, can be equalised by price adjustment of the assets in the long run (Froot and Stein, 1989). Froot and Stein (1989) argue that the economy is distorted by informational imperfection (p. 4), and opportunities are not equal across borders. There are merits in holding foreign assets. The difference in cultures, work ethics and way of life can have markedly different efficiency outcome. Empirical study by Froot and Stein (1991) shows that in the 1970s and 1980s the U.S. experienced large inwards foreign direct investment due to weak dollar. The study found that because of weak home currency the foreign direct investment had increased in this time and multinational firms came in U.S. for investment. Caves (1988) also found that the strength of a countrys currency, relative to the dollar, is an important explanatory variable for its direct investment in the United States. Today, there exists a common wisdom regarding the relationship between FDI and exchange rate. When a countrys currency devalues, it is viewed as an opportunity for foreign investors to purchase assets at a reduced cost. This is especially true when foreign firms have identified specific assets in their targeted markets (Blonigen, 1997). Blonigen (1997) furthermore presents how a real currency depression in the host country can increase skill FDI in this country which help it to boost the currency and empower the exports to compete in the world market. Campa (1993), predicts a negative relationship between real home country currency valuation and FDI transactions to the host country. Barrell and Pain (1996) find that investors tend to postpone their investment when the currency in the targeted market strengthens. This occurs when investors are speculating the currency to depreciate in the future and thus maximise the profit of their investment at a later stage. Because of this reactionary nature of investors behaviour, they have also noted that there is a significant time lag between exchange rate changes and FDI movement. Ahn et al. (1998) note mixed sentiment toward increasing FDI competitiveness by devaluating currency. However, they find that empirical research generally shows a positive impact. Erramilli and DSouza (1995) find that exchange rate volatility is one of the contributors toward external uncertainty in an economy that have a major effect on FDI inflow. Campa (1993) notes that lack of information in a volatile environment would deter investment, and unlike portfolio flows, FDI offers investors very few instruments to hedge against such risk (Bnassy-Qur, Fontagn and Lahrche-Rvil, 2001). In a study in Ghana, Kyereboah-Coleman and Agyire-Tettey (2008) find that volatility in exchange rate has a significantly negative impact on FDI inflow and that inappropriate macroeconomic policy can result in overvaluing the currency; therefore, discouraging FDI. Similar to the findings from Barrell and Pain, they also note that the lag in FDI is highly significant. However, high exchange rate volatility does not always imply a negative effect on FDI Inflow. Qin (2002) finds that if a low differential in purchasing power parity exists between trading countries, twoway FDI can occur. And FDI would become an instrument for local producers to hedge their risk in a volatile exchange rate environment. Klein and Rosengren (1994) show that the importance of this relative wealth channel exceeded the importance of the relative wage channel in explaining FDI inflows to the United States during the period from 1979 through 1991. 6|P a ge

Blonigen (1997) makes a firm-specific asset argument to support a role for exchange rates mov ements in influencing FDI. Suppose that foreign and domestic firms have equal opportunity to purchase firmspecific assets in the domestic market, but different opportunities to generate returns on these assets in foreign markets. In this case, currency movements may affect relative valuations of different assets. While domestic and foreign firms pay in the same currency, the firm-specific assets may generate returns in different currencies. The relative level of foreign firm acquisitions of these assets may be affected by exchange rate movements. In the simple stylized example, if a representative foreign firm and domestic firm bid for a foreign target firm with firm-specific assets, real exchange rate depreciations of the foreign currency can plausibly increase domestic acquisitions of these target firms. Again, this channel predicts that foreign currency depreciation will lead to enhanced FDI into the foreign economy. Data on Japanese acquisitions in the United States support the hypothesis that real dollar depreciations make Japanese acquisitions more likely in U.S. industries with firm-specific assets. In addition to these arguments supporting the effects of levels of exchange rates, volatility of exchange rates also matters for FDI activity. Theoretical arguments for volatility effects are broadly divided into production flexibility arguments and risk aversion arguments. To understand the production flexibility arguments, consider the implications of having a production structure whereby producers need to commit investment capital to domestic and foreign capacity before they know the exact production costs and exact amounts of goods to be ordered from them in the future. When exchange rates and demand conditions are realized, the producer commits to actual levels of employment and the location of production. As Aizenman (1992) nicely demonstrated, the extent to which exchange rate variability influences foreign investment hinges on the sunk costs in capacity (i.e. the extent of investment irreversibilities), on the competitive structure of the industry, and overall on the convexity of the profit function in prices. In the production flexibility arguments, the important presumption is that producers can adjust their use of a variable factor following the realization of a stochastic input into profits. Without this variable factor, i.e. under a productive structure with fixed instead of variable factors, the potentially desirable effects on profits of price variability are diminished. By the production flexibility arguments, more volatility is associated with more FDI ex ante, and more potential for excess capacity and production shifting ex post, after exchange rates are observed. An alternative approach linking exchange-rate variability and investment relies on risk aversion arguments. The logic is that investors require compensation for risks that exchange rate movements introduce additional risk into the returns on investment. Higher exchange-rate variability lowers the certainty equivalent expected exchange-rate level, as in Cushman (1985, 1988). Since certainty equivalent levels are used in the expected profit functions of firms that make investment decisions today in order to realize profits in future periods. If exchange rates are highly volatile, the expected values of investment projects are reduced, and FDI is reduced accordingly. These two arguments, based on production flexibility versus risk aversion, provide different directional predictions of exchange rate volatility implications for FDI. The argument that producers engage in international investment diversification in order to achieve ex post production flexibility and higher profits in response to shocks is relevant to the extent that ex post production flexibility is possible within the window of time before the realization of the shocks. This suggests that the production flexibility argument is less likely to pertain to short term volatility in exchange rates than to realignments over longer intervals. When considering the existence and form of real effects of exchange rate variability, a clear distinction must be made between short term exchange rate volatility and longer term misalignments of exchange rates. For sufficiently short horizons, ex ante commitments to capacity and to related factor costs are a more realistic assumption than introducing a model based on ex post variable factors of production. Hence, risk aversion arguments are more convincing than the production flexibility arguments posed in relation to the effects of short-term exchange rate variability. For variability assessed over longer time horizons, the production flexibility motive provides a more compelling rationale for linking foreign direct investment flows to the variability of exchange rates. 7|P a ge

As exposited above, the exchange rate effects on FDI are viewed as exogenous, unanticipated, and independent shocks to economic activity. Of course, to the extent that exchange rates are best described as a random walk, this is a reasonable treatment. Otherwise, it is inappropriate to take such an extreme partial equilibrium view of the world. Accounting for the co-movements between exchange rates and monetary, demand, and productivity realizations of countries is important. As Goldberg and Kolstad (1995) show, these correlations can modify the anticipated effects on expected profits, and the full presumption of profits as decreasing in exchange rate variability. Empirically, exchange rate volatility tends to increase the share of a countrys productive capacity that is located abroad. Analysis of two-way bilateral foreign direct investment flows between the United States, Canada, Japan, and the United Kingdom showed that exchange rate volatility tended to stimulate the share of investment activity located on foreign soil. For these countries and the time period explored, exchange rate volatility did not have statistically different effects on investment shares when distinguished between periods where real or monetary shocks dominated exchange rate activity. Real depreciations of the source country currency were associated with reduced investment shares to foreign markets, but these results generally were statistically insignificant. Although theoretical arguments conclude that the share of total investment located abroad may rise as exchange rate volatility increases, this does not imply that exchange rate volatility depresses domestic investment activity. In order to conclude that domestic aggregate investment declines, one must show that the increase in domestic outflows is not offset by a rise in foreign inflows. In the aggregate United States economy, exchange rate volatility has not had a large contractionary effect on overall investment (Goldberg 1993). Overall, the current state of knowledge is that exchange rate volatility can contribute to the internationalization of production activity without depressing economic activity in the home market. The actual movements of exchange rates can also influence FDI through relative wage channels, relative wealth channels, and imperfect capital market arguments.

Inflation & FDI

A host countrys economic instability can be a major deterrent to FDI inflow. As briefly discussed in previous sections, any form of instability introduce a form of uncertainty that distort investors perception on the future profitability in the country (Erramilli and DSouza, 1995). Akinboade, Siebrits and Roussot (2006, p. 190-191) state that low inflation is taken to be a sign of internal economic stability in the host country. High inflation indicates the inability of the government to balance its budget and the failure of the central bank to conduct appropriate monetary policy. In other words, inflation can be used as an indicator of the economic and political condition of the host country, but the differences between high inflation and low inflation is not distinct (Ahn, Adji and Willett, 1998). A few literatures offer some distinctions on the level of inflation. Rogoff and Reinhart (2002) find that high inflation does not happened in the absence of other macroeconomic problems. The cost of inflation can have prominent effect on the economys growth. This hindrance is more prominent at an inflation rate at 40% and higher, but they also note that a country with higher inflation rate, especially below the 40% level, is worse off than a country with slightly lower inflation. The comparative figure they quoted was 10% compare to 5% (p. 30). Lipsey and Chrystal (2006, p. 578) offer a definition for hyperinflation. They state it as Inflation so rapid that money ceases to be useful as a medium of exchange and a store of value. But they also concede that countries with inflation rate higher than 50%, to some 200% plus, have proven to be manageable as the population adjusts in real term. Glaister and Atanasova (1998) mention the effect of high inflation had on employment in Bulgaria. Although they did not draw direct inferences to the relationship between FDI and inflation, they seem to

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suggest that high inflation can cause various problems within the country to reduce its attractiveness to foreign investors. Coskun (2001, p. 225) suggests that lower inflation and interest rate coupled with other factors such as full membership with the EU and high economic growth can attract foreign investors and increase the FDI inflow into Turkey. Wint and Williams (2002) show that a stable economy attracts more FDI, thus a low inflation environment is desired in countries that promote FDI as a source of capital flow. Ahnsy et al. (1998) explored the relationship between exchange rate, inflation and FDI over the period 1970 to 1981 for developing countries and found high inflation rate effect negatively to FDI inflows. He also observed that over valuation of exchange rate is the result of high inflation rate that adversely affect FDI inflows. According to Akinboade, (2006) low inflation is taken to be a sign of internal economic stability in the host country. Any form of instability introduce a form of uncertainty that distort investor perception of the future profitability in the country. Wint and Williams (1994) show that a stable economy attracts more FDI thus a low inflation environment is desired in countries that promote FDI as a source of capital flow. Therefore the study expects a negative relationship in the regression analysis.

Inflation does not affect FDI directly, but it does have an influence on factors such as unemployment, labour wages and economic growth. These factors form important criteria in foreign investors decision process of entering a market. High inflation is an indication of economic instability and it destroys the value of money (Lipsey and Chrystal, 2006). Value destruction implies a negative impact on economic growth and it can infer that the impact on FDI is negative.

FDI & Interest Rate

In the presence of sticky prices, uncertainty over monetary policy also plays a role in foreign market entry. Russ (2007) shows that an increase in interest rate volatility may in principle attract or deter foreign investments, depending on whether it originates in the domestic or the foreign country. The reason is that multinational activities offer a natural hedge against currency risks generated by interest rate changes in the host country. In periods of low demand in the host-country market, namely when foreign interest rates are high, multinational profits in fact appreciate in domestic currency. The opposite clearly occurs when monetary uncertainty originates in the multinationals native country. Focusing on the business cycle in the source country, for example, Wang and Wong (2007) find that an increase in output volatility reduces FDI outflows, especially among OECD countries. In this vein, Levy Yeyaty et al. (2007) find that FDI flows from developed towards developing countries move countercyclically with respect to both output and interest rate cycles in the source country.

Previous studies have shown that the cost of raising capital in a country affects its FDI outflow (e.g., Froot and Stein, 1991; Pan, 2002). Higher lending rates increase such costs, causing firms to earn higher profits to meet their expectations net of debt repayments. Domestically, it can be argued that firms compete on roughly equal footing, because they are faced with similar interest rates. Internationally, however, firms from source countries with high lending rates are at a cost disadvantage in raising capital, compared with those from countries with low lending rates (Grosse and Trevino, 1996). One might expect that, in a world with mobile capital, risk-adjusted expected returns on all international assets would be equalized, meaning that interest rate differences should have no bearing on FDI. In reality, capital mobility is not perfect. Only very large multinational corporations can raise capital internationally. In addition, complications such as hidden costs and exchange rate fluctuations work 9|P a ge

against raising capital in a third country. Grosse and Trevino (1996) found that the cost of borrowing at home did affect outward FDI into the United States. The interest rate is the rate which is charged or paid for the use of money or more precisely the cost of borrowing. According to Gross and Trevino (1996) a relatively high interest rate in a host country has a positive impact on inward FDI. However the direction of the impact could be in a reverse if the foreign investors depend on host countries capital market for raising FDI fund. The researcher has used prime lending rates because investors are lenders and borrowers.

Foreign Exchange Reserve & FDI

Li Qingyun and Song Fangxiu (2005) classified various kinds of FDI in details and estimated the real effect of the capital account on foreign currency reserves. According to their research, though they are written in balance of payments, FDIs investment in equipment, technology a nd the re-investment of profits cannot reflect the demand and supply of international trade. An investigation done by (Mohanty and Turner in 2006) states that Over the past several years emerging market economies has accumulated their foreign exchange reserves on an unprecedented scale, and over the past few years these economies faced considerable excess ability low inflation and having an upward pressure on their currencies. In this perspective, reserve buildup did not generate the dilemma that was faced by the policymakers in the periods of high inflation when they were supposed to choice one of the objectives among exchange rate and inflation. Countries that have accumulated foreign exchange reserves do not agree with many of the previous argument according to (Feldstein, 1998,Wyplosz 2006). They want to secure themselves against foreign exchange market turbulence and they use the strategy of accumulating foreign reserves. De Mello (1997) argued that FDI enhances long run economic growth via technological progress, capital accumulation and human capital augmentation. The role of financial sector development on economic growth was first studied by Schumpeter (1911). Later study by Patrick (1966) argued that financial sector induces economic growth via the following channels: reallocation of resources from traditional to growthinducing sectors and the promotion of entrepreneurship in growth-inducing sectors. Belem Vasquez (2002) found that instruments related to fiscal policy like public expenditure and investment in infrastructure seem to affect capital accumulation positively, attract more FDI and improve human capital development.

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ANALYSIS AND FINDINGS 3.1 FDI & EXCHANGE RATE

One of the many influences on FDI activity is the behavior of exchange rates. Exchange rates, defined as the domestic currency price of a foreign currency, matter both in terms of their levels and their volatility. Exchange rates can influence both the total amount of foreign direct investment that takes place and the allocation of this investment spending across a range of countries. When a currency depreciates, meaning that its value declines relative to the value of another currency, this exchange rate movement has two potential implications for FDI. First, it reduces that countrys wages and production costs relative to those of its foreign counterparts. All else equal, the country experiencing real currency depreciation has enhanced "locational advantage" or attractiveness as a location for receiving productive capacity in vestments. By this relative wage channel, the exchange rate depreciation improves the overall rate of return to foreigners contemplating an overseas investment project in this country. The exchange rate level effects on FDI through this channel rely, on a number of basic considerations. First, the exchange rate movement needs to be associated with a change in the relative production costs across countries, and thus should not be accompanied by an offsetting increase in the wages and production costs in the destination market for investment capital. Second, the importance of the relative wage channel may be diminished if the exchange rate movements are anticipated. Anticipated exchange rate moves may be reflected in a higher cost of financing the investment project, since interest rate parity conditions equalize risk-adjusted expected rates of returns across countries. By this argument, stronger FDI implications from exchange rate movements arise when these are unanticipated and not otherwise reflected in the expected costs of project finance for the FDI. Consider what occurs when exchange rates move. A depreciation of the destination market currency raises the relative wealth of source country agents and can raise multinational acquisitions of certain destination market assets. To the extent that source country agents hold more of their wealth in own currency-denominated form, a depreciation of the destination currency increases the relative wealth position of source country investors, lowering their relative cost of capital. This allows the investors to bid more aggressively for assets abroad. Overvaluing currency can deter FDI as it is perceived to higher the cost of entry. Graphical view of foreign exchange rate and FDI:
Exchange rate 100 80 60 40 20 0 Taka per USD FDI 2000 Million USD

1500 1000
500 0

2000-01

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

Figure1.2: FDI and Exchange Rate from fiscal year 1994 to 2013.

2012-13

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Here the graph indicates that exchange rate in our country has the upward movement but FDI did not follow the trend exactly.

Statistical test for the relationship between FDI and Foreign Exchange:
For analyzing the relationship between FDI and Foreign Exchange, we have made a simple regression. Here the dependant variable is FDI and the independent variable is Foreign Exchange. Regression output of this analysis is shown below:

SUMMARY OUTPUT Regression Statistics Multiple R 0.051628158 R Square 0.002665467 Adjusted R Square 0.052742007 Standard Error 13.32896494 Observations 20 ANOVA df Regression Residual Total 1 18 19 Coefficients 56.94421534 0.002373522 Significance SS MS F F 8.546686121 8.546686121 0.048106627 0.828859202 3197.903514 177.6613063 3206.4502 Standard Error t Stat P-value Lower 95% Upper 95% 7.904661396 7.203877875 1.05454E-06 40.33713802 73.55129267 0.010821581 0.219332229 0.828859202 0.020361777 0.02510882

Intercept Foreign Ex.

The desired equation isFDI = 56.94421534 + 0.002373522* Foreign Exchange Reserve Interpretation: The Slope of the Variable is 0.002373522, which indicates that if the Foreign Exchange Rate increases for one unit, FDI will be increased by 0.002373522 units. The explanatory power of the independent variable can be assessed with the help of the coefficient of determination (R 2). From the regression statistics it is found that R2 = 0.002665467, which indicates that only 0.2665% variations in percentage change in FDI 12 | P a g e

can be explained by the variation of the Foreign Exchange Rate. From the Regression output it is found that, the result is not statistically significant, because the significance of F is 0.828859202 or 82.89% which is greater than 0.05 or 5% level. P value is 0.828859202 which is greater than 0.05, so it can be concluded that the regression slope coefficient is not significant. The table value of T is 2.1009 with degrees of freedom 18 and the calculated T value is 0.219332229. Here the calculated value is within the range between 2.1009 and -2.1009, which indicates that null hypothesis is accepted at the .05 significance level and there is no significant relationship between FDI and foreign exchange reserve.

3.2 FDI & INFLATION

Inflation is measured by the consumer price index and reflects the annual percentage change in the cost of goods and services. Inflation rates have increased from around 5 to 10% on average in developing countries during the 1970s, followed by an increase of 49% on average among developing countries between 1985 and 1994. This trend of increasing inflation rates has been reversed in the late 1990s; the inflation rates in developing countries have on average declined to 9.2% during 1995-2004, a period during which the net FDI inflows as a share of GDP have more than doubled in the middle income countries. Given the focus among developing countries to attract more FDI, it is interesting to analyze whether the increasing inflation rates in the 1970s and 1980s might have been a deterrent for FDI inflows and whether their reversal in the 1990s might have contributed to the increase in FDI inflows to these economies. Despite not providing conclusive evidence, the coincidences of high inflation and low FDI versus the low inflation and high FDI inflows into these developing countries motivates investigation of the possible links between the two variables. We can include macroeconomic instability as measured by the inflation rate which is included in the model because it impacts on foreign direct investment (FDI) in a globalized environment in three important ways. First, a rising inflation rate will deter FDI for export purposes because of the deterioration in international competitiveness. This is particularly the case for FDI which use developing economies for the production and export of the relatively lower value added goods. Secondly, the inability to be internationally competitive will lead to stronger import penetration which in turn will discourage FDI which is geared towards the domestic market. This is particularly pertinent for the large developing economies which can lose large quantities of FDI which are normally associated with big domestic markets. Furthermore, a rising inflation rate will increase interest rates and hence the cost of borrowing. This has negative implications for foreign (and domestic) firms seeking in the domestic market to borrow to invest in new and superior capital goods which can raise productivity, combat costs of production and hence improve international competitiveness.These literatures have highlighted that inflation destroys the value of currency. The impact on growth is negative, and in turn, a negative impact on FDI. Graphical view of inflation and FDI:

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Inflation
12 10 8 6 4 2 0

FDI
1600 1400 1200 1000 800 600 400 200 0

Inflation rate %

1996-97

2005-06

1993-94

1994-95

1995-96

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

Figure1.3: FDI and Inflation Rate from fiscal year 1994 to 2013.

Here the graph indicates relationship between the inflation and FDI is somewhat in same direction. But there remains no linear relationship in these variables. Statistical test for the relationship between FDI and Inflation: For analyzing the relationship between FDI and Inflation, we have made a simple regression. Here the dependant variable is FDI and the independent variable is Inflation. Regression output of this analysis is shown below: SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total 1 18 19 SS MS F Significance F 0.109364677 0.011960632 0.042930444 288.5735796 20

18145.35775 18145.35775 0.217897577 0.646246916 1498944.795 83274.71086 1517090.153

2012-13

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Million USD

Coefficients Intercept Inflation 602.7102865 11.55783904

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

170.8214212 3.528306242 0.002400936 243.8277985 961.5927746 24.75998864 0.466795006 0.646246916 40.46096672 63.57664479

The desired equation isFDI = 602.7103 + 11.5578* Inflation rate Interpretation: The Slope of the Variable is 11.5578, which indicates that if the Inflation Rate increases for one unit, FDI will be increased by 11.5578 units. The explanatory power of the independent variable can be assessed with the help of the coefficient of determination (R 2). From the regression statistics it is found that R 2 = 0.01196, which indicates that only 1.196% variations in percentage change in FDI can be explained by the variation of the Inflation Rate. From the Regression output it is found that, the result is not statistically significant, because the significance of F is 0.6462 or 64.62% which is greater than 0.05 or 5% level. P value is 0.65 which is greater than 0.05, so it can be concluded that the regression slope coefficient is not significant. The table value of T is 2.1009 with degrees of freedom 18 and the calculated T value is 0.466795. Here the calculated value is within the range between 2.1009 and -2.1009, which indicates that null hypothesis is accepted at the .05 significance level and there is no significant relationship between FDI and inflation. .

3.3 FDI & INTEREST RATE

A rise in foreign interest rate volatility, however, may induce a substitution effect in favor of exports that actually reduces foreign investments. In a setting where exports are priced in the currency of producers while multinational sales are set in local (consumers) currency, exchange rate changes originated abroad help exporters to adjust the price of their products, thereby making exports more attractive than multinational sales. Firms from countries with low interest rates enjoy a cost advantage that enables them to raise more capital with a lower burden of interest payment. Holding other factors constant, such firms should be able to raise more capital for overseas investment. In the case of a decrease in domestic interest rates, they might invest less money (as the value of the money to the foreign party will be relatively constant),in the case of a country with increasing domestic interest rates, they may invest more money, as the value will decrease of that pile of money over time.

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In the case of a recipient country with flat or decreasing interest rates, they're likely to also receive less money, as the money will be worth the same, or more, however, in the other scenario, they're likely to get more money invested, as the worth will decrease over time Graphical view of interest rate and FDI:
Interest rate 18 17 16 15 14 13 12 FDI 1600 1400 1200 1000 800 600 400 200 0

Intrest rate %

1997-98

2004-05

1993-94

1994-95

1995-96

1996-97

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

Figure1.4: FDI and Interest Rate from fiscal year 1994 to 2013.

Here the graph indicates that both upward and downward trend doesn t follow each other. Rather there seems no relationship between the variables. Statistical test for the relationship between FDI and Interest Rate: For analyzing the relationship between FDI and Interest Rate, we have made a simple regression. Here the dependant variable is FDI and the independent variable is Interest Rate. Regression output of this analysis is shown below: SUMMARY OUTPUT Regression Statistics Multiple R 0.305351118 R Square 0.093239305 Adjusted R Square 0.042863711 Standard Error 276.4494852 Observations ANOVA df SS MS F Significance 16 | P a g e 20

2012-13

Million USD

F Regression Residual Total 1 18 19 141452.4317 141452.4317 1.850882489 0.190475149 1375637.721 76424.31786 1517090.153 Standard Error

Coefficients Intercept Interest Rate 1915.170124 84.61544737

Lower 95% Upper 95% 912.537258 2.098730881 0.050215085 1.999511027 3832.339758 62.19568159 1.360471422 0.190475149 215.2837254 46.05283069

t Stat

P-value

The desired equation isFDI = 1915.170124 - 84.61544737* Interest Rate Interpretation: The Slope of the Variable is 84.61544737, which indicates that if the Interest Rate increases for one unit, FDI will be decreased by 84.61544737 units. The explanatory power of the independent variable can be assessed with the help of the coefficient of determination (R 2). From the regression statistics it is found that R2 = 0.093239305, which indicates that only 9.32% variations in percentage change in FDI can be explained by the variation of the Interest Rate. From the Regression output it is found that, the result is not statistically significant, because the significance of F is 0.190475149 or 19.05% which is greater than 0.05 or 5% level. P value is 0.19 which is greater than 0.05, so it can be concluded that the regression slope coefficient is not significant. The table value of T is 2.1009 with degrees of freedom 18 and the calculated T value is -1.360471422. Here the calculated value is within the range between 2.1009 and 2.1009, which indicates that null hypothesis is accepted at the .05 significance level and there is no significant relationship between FDI and interest rate.

3.4 FDI & MONETARY BASE

The currency in circulation, issued by the central bank, and the balance on the current accounts of credit institutions kept with the central bank, constitute the monetary base (M0). Monetary base is highly liquid money that includes coins, paper money (both vault cash and currency circulating in the public), and commercial banks reseve with the central bank. Monetary policy tools that affect directly the monetary base. Monetary base can be expanded or contracted using an expansionary monetary policy or a contractionar monetary policy.The monetary base is controlled by the central bank in our country that 17 | P a g e

controls monetary policy. Bangladesh Bank impact the monetary base through open market transactions. The monetary base is also called base money, money base, high-powered money, reserve money. It called high-powered because an increase in the monetary base will result in a much larger increase in the supply of demand deposit through banks' loan-making activities. One of most important factors that influences FDI is monetary base. The central bank modifies the quantity of the monetary base in order to influence the money supply that influence the aggregate demand and supply in the economy which in turn influences the FDI. So It can be hypothesised that there is a positive relation between Monetary base and FDI. Graphical view of monetary base and FDI:
Monetary Base
120000 100000 Crore Taka 80000 60000 40000 20000 0

FDI
1600 1400 1200 1000 800 600 400 200 0

1994-95

1999-00

2004-05

1993-94

1995-96

1996-97

1997-98

1998-99

2000-01

2001-02

2002-03

2003-04

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

Figure1.7: FDI and Monetary Base from fiscal year 1993-94 to 2012-13.

Here the graph indicates that Monetary Base in our country has the upward movement but FDI did not follow the trend. Statistical test for the relationship between FDI and Monetary Base: For analyzing the relationship between FDI and Monetary Base, we have made a simple regression. Here the dependant variable is FDI and the independent variable is Monetary Base. Regression output of this analysis is shown below: SUMMARY OUTPUT

Regression Statistics Multiple R 0.191583375 18 | P a g e

2012-13

Million USD

R Square Adjusted R Square Standard Error Observations

0.03670419 0.016812244 284.9372824 20

ANOVA df Regression Residual Total 1 18 19 SS MS F Significance F

55683.56474 55683.56474 0.685848944 0.418425674 1461406.588 81189.25491 1517090.153 Standard Error

Coefficients Intercept M0 610.9051304 0.001738752

t Stat

P-value 1.10975E-05

Lower 95%

Upper 95%

101.6898593 6.007532456

397.262664 824.5475968 0.002099536 0.828159975 0.418425674 0.002672209 0.006149712

The desired equation isFDI = 610.905 + 0.001739* Monetary Base Interpretation: The Slope of the Variable is 0.001739, which indicates that if the Monetary Base increases for one unit, FDI will be increased by 0.001739 units. The explanatory power of the independent variable can be assessed with the help of the coefficient of determination (R2). From the regression statistics it is found that R2 = 0.0367, which indicates that only 3.67% variations in percentage change in FDI can be explained by the variation of the Monetary Base. From the Regression output it is found that, the result is not statistically significant, because the significance of F is 0.4184 or 41.84% which is greater than 0.05 or 5% level. P value is 0.42 which is greater than 0.05, so it can be concluded that the regression slope coefficient is not significant. The table value of T is 2.1009 with degrees of freedom 18 and the calculated T value is 0.8282. Here the calculated value is within the range between 2.1009 and -2.1009, which indicates that null hypothesis is accepted at the .05 significance level and there is no significant relationship between FDI and Monetary Base.

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3.5 FDI & FOREIGN CURRENCY RESERVES

Theoretically speaking, the net effect of FDI on the foreign currency reserves should equal zero. FDI is attracted into developing countries due to the shortage of savings and foreign currency reserve. FDI inflow can solve these two problems. On the one hand, FDI raises funds for domestic investment; on the other hand, it boosts imports by providing foreign currency reserves. Therefore, in a perfect situation, FDI will be transformed into imports in the invested country and will offset the surplus under the capital account in the form of trade deficits, therefore not causing a dramatic change in foreign reserves. This conclusion was evidenced in many developing countries. As pointed out by other scholars, the double entry bookkeeping used in balance of payments magnifies the real contribution of FDI to the foreign currency reserves. A scenario of FDI and Foreign Currency Reserves from fiscal year 1993-94 to 2012-13 is shown below in a graph:
FX Reserve 16000 14000 12000 10000 8000 6000 4000 2000 0 FDI 1600 1400 1200 1000 800 600 400 200 0

1994-95

2005-06

2006-07

1993-94

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2007-08

2008-09

2009-10

2010-11

2011-12

Figure1.6: FDI and Foreign Currency Reserves from fiscal year 1994 to 2013.

2012-13

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Million USD

Statistical test for the relationship between FDI and Foreign Currency Reserves: For analyzing the relationship between FDI and Foreign Currency Reserves, we have made a simple regression. Here the dependant variable is FDI and the independent variable is Foreign Currency Reserves. Regression output of this analysis is shown below:
SUMMARY OUTPUT Regression Statistics Multiple R 0.271 R Square 0.073 Adjusted R Square 0.022 Standard Error 279.485 Observations 20 ANOVA df 1 18 19 SS 111075.10 1406015.05 1517090.15 Standard Error 98.9440 0.0165 MS 111075.10 78111.95 F 1.42 Significance F 0.25

Regression Residual Total

Intercept FX Reserve

Coefficients 585.0669 0.0196

t Stat 5.9131 1.1925

P-value 0.0000134 0.2486

Lower 95% 377.1932 -0.0150

Upper 95% 792.9406 0.0542

Lower 95.0% 377.1932 -0.0150

Upper 95.0% 792.9406 0.0542

The desired equation isFDI = 585.0669 + 0.0196* Foreign Currency Reserve Interpretation: The Slope of the Variable is 0.0196, which indicates that if the Foreign Exchange Reserve increases for one unit, FDI will be increased by 0.0196 units. The explanatory power of the independent variable can be assessed with the help of the coefficient of determination (R 2). From the regression statistics it is found that R2 = 0.073, which indicates that only 7.3% variations in percentage change in FDI can be explained by the variation of the Foreign Exchange Reserve. From the Regression output it is found that, the result is not statistically significant, because the significance of F is 0.25 or 25% which is greater than 0.05 or 5% level. P value is 0.2486 which is greater than 0.05, so it can be concluded that the regression slope coefficient is not significant. The table value of T is 2.086 with degrees of freedom 19 and the calculated T value is 1.1925. Here the calculated value is within the range between 2.086 and -2. 086, which indicates that null hypothesis is accepted at the .05 significance level and there is no significant relationship between FDI and foreign exchange reserve.

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3.6 FDI & PRIVATE CREDIT

The role of FDI and financial sector development on economic growth is a widely discussed issue. FDI enhances long run economic growth via technological progress, capital accumulation and human capital augmentation. Financial sector induces economic growth via the following channels: reallocation of resources from traditional to growth-inducing sectors and the promotion of entrepreneurship in growthinducing sectors. Financial development increases the return on innovation by providing three services. These services include - effective evaluation of investment projects through the acquisition of information; ability to pool and mobilize household savings for innovative endeavors; and, ability to share and diversify risks to enhance innovation of intermediate goods.

Graphical view of Credit to Private sector and FDI:

Credit to Private 2000 Crore Taka 1500 1000 500 0 FDI 500000 400000 300000 200000 100000 0

1997-98

2002-03

2007-08

1993-94

1994-95

1995-96

1996-97

1998-99

1999-00

2000-01

2001-02

2003-04

2004-05

2005-06

2006-07

2008-09

2009-10

2010-11

2011-12

Figure1.7: FDI and Credit to Private sector from fiscal year 1994 to 2013

Here the graph indicates that interest rate in our country has the discrete movement and FDI is discrete in nature. But the both upward and downward trend doesnt follow each other. Rather there seems no relationship between the variables.

Statistical test for the relationship between FDI and Private Credit: For analyzing the relationship between FDI and Private Credit, we have made a simple regression. Here the dependant variable is FDI and the independent variable is Private Credit. Regression output of this analysis is shown below:
SUMMARY OUTPUT Regression Statistics

2012-13

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Million USD

Multiple R R Square Adjusted R Square Standard Error Observations ANOVA

0.167 0.028 -0.026 286.237 20

Regression Residual Total

df 1 18 19

SS 42325.255 1474764.898 1517090.153 Standard Error 97.354 0.001

MS 42325.255 81931.383

F 0.517

Significance F 0.482

Intercept Private Credit

Coefficients 623.816 0.000373

t Stat 6.408 0.719

P-value 0.0000049 0.482

Lower 95% 419.283 -0.001

Upper 95% 828.349 0.001

Lower 95.0% 419.283 -0.001

Upper 95.0% 828.349 0.001

The desired equation isFDI = 623.816 + 0.000373* Private Credit Interpretation: The Slope of the Variable is 0.000373, which indicates that if the Private Credit increases for one unit, FDI will be increased by 0.000373 units. The explanatory power of the independent variable can be assessed with the help of the coefficient of determination (R 2). From the regression statistics it is found that R2 = 0.028, which indicates that only 2.8% variations in percentage change in FDI can be explained by the variation of the Private Credit. From the Regression output it is found that, the result is not statistically significant, because the significance of F is 0.482 or 48.2% which is greater than 0.05 or 5% level. P value is 0.482 which is greater than 0.05, so it can be concluded that the regression slope coefficient is not significant. The table value of T is 2.086 with degrees of freedom 19 and the calculated T value is 0.719. Here the calculated value is within the range between 2.086 and -2.086 which indicates that null hypothesis is accepted at the .05 significance level and there is no significant relationship between FDI and private credit.

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3.7 IMPACT ASSESSMENT OF MONETARY POLICY ON FDI COMBINING ALL VARIBLES AS A WHOLE Hypothesis Testing
Model Hypothesis:

1. Null Hypothesis (Ho): There is NO relationship between FDI to Monetary Base (MB), Private Credit, inflation, interest rate, forex reserve, foreign exchange rate. If, P>|t| value of F- statistics is greater than .05, Ho is accepted otherwise it will be rejected.

2. Alternative Hypothesis (H1): There is a relationship FDI to Monetary Base (MB), Private Credit, inflation, interest rate, forex reserve, foreign exchange rate. If, P>|t| of value of F- statistics is less than .05, H1 is accepted otherwise it will be rejected.

Coefficients Hypothesis:

H1- one: MB is significantly related to the FDI. If, P>|t| value is less than .05, H1 is accepted otherwise it will be rejected. H1- Two: Private credit is significantly related to the FDI. If, P>|t| value is less than .05, H1 is accepted otherwise it will be rejected. H1- Three: Inflation is significantly related to the FDI. If, P>|t| value is less than .05, H1 is accepted otherwise it will be rejected. H1- Four: Interest rate is significantly related to the FDI. If, P>|t| value is less than .05, H1 is accepted otherwise it will be rejected. H1- Five: Forex reserve rate is significantly related to the FDI. If, P>|t| value is less than .05, H1 is accepted otherwise it will be rejected. H1- Six: Foreign exchange rate is significantly related to the FDI. If, P>|t| value is less than .05, H1 is accepted otherwise it will be rejected.

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Outcome of analysis ans interpreion: To find out the extent of influence of independent variables such as Monetary Base (MB0), Private Credit, Forex Reserve, Foreign Exchange rate, Inflation rate & Interest rate in determining the amount of dependent variable (FDI), multiple regression analysis has been done using the statistical software stata11. The summary of multiple regression analysis has been shown in the below.

Interpretation of the Findings: The regression equation will be as follows: FDI= 5.46 -0.14 MB - 0.26 Private Credit - 0.03 Inflation +0 .75 exchange reserve - 0 .11 foreign exchange rate + 0.002 interest rate.
From the outcome of regression table, we have found that, significance level of F-state (0.31) is not less than .05. Its basically implies that our established model is statistically insignificant. So, Ho of model is accepted. Besides, from the coefficients table, we can see that direction of sign of all the independent variables is theoretically correct, but p values are not statistically significant. Because they are not less than 0.05. So, null hypotheses for all independent variables are accepted. Thats mean; there are no significant

relationships between FDI with Monetary Base (MB0), Private Credit, Forex Reserve, Foreign Exchange rate, Inflation rate & Interest rate in Bangladesh.

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At last, by the value of adjusted R-square, it can be predicted that about 9.5 % changes in FDI can be explained by changes in Monetary Base (MB0), Private Credit, Forex Reserve, Foreign Exchange rate, Inflation rate & Interest rate, if they will be statistically significant.

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CONCLUSION AND POLICY IMPLICATIONS

This paper investigates the determinants of FDI inflows in Bangladesh, concentrating on the effects of monetary policies. The objective of this research was to have a better understanding of the relationship between FDI and different monetary policy components. In this regard, we examined six variables Inflation, exchange rate, Foreign exchange reserve, monetary base, interest rate and credit to private sector, which influence the level of FDI Bangladesh and used empirical data to examine whether higher FDI inflow can be induced by these variables. We aim to test whether any relationship exists between FDI inflow into a country and the countrys monetary policy impacts regarding its exchange rate, inflation rate, interest rate, FX reserve, M0 and private sector credits.This research serves to provide a better understanding in the role monetary policy plays in the growth of FDI inflow in an emerging economy. Linear regression analysis was done on economic data, collected from Bangladesh Bank library, to determine the relationship between FDI inflows, Inflation, exchange rate, Foreign exchange reserve, monetary base, interest rate and credit to private sector. This research found that among factors that are expected to have a more visible relationship with FDI, interest rate had a negative impact; exchange rate had a positive impact where the impact of inflation was debatable. On the other hand, factors like FX reserve, M0 and private sector credit that are expected to induce FDI indirectly; all were positively related with FDI. We observed that, as the local currency depreciated, the FDI inflow increased. Although the relationship was not significant, the positive relationship represents the tendency towards gaining the locational advantage arising out of currency devaluation. Interest rate on the other hand, is found to be in versely related with FDI. This explains the investors preference towards moving in the country where they might borrow at relatively lower interest rate. And in case of Bangladesh, FDI in portfolio investments is very low. As a result, the negative impact on the FDI due to decreasing interest rate is insignificant. In case of inflation, a rising rate will deter FDI for export purposes because of the deterioration in international competitiveness. This should be the case for Bangladesh whereFDI inflows generally happen for the production and export of the relatively lower value added goods. But from our observation, the relationship was not negative, but on the contrary, the relationship is positive. The other three variables do not affect the FDI inflows in that apparent ways. As for theM0, as money supply influences the aggregate demand and supply in the economy which in turn influences the FDI itis assumed that there is a positive relation between Monetary base and FDI. This was observed in our case of Bangladesh. The same applies to FX reserve and Private sector credit. Both have impact on the level of investment and thus the aggregate demand and supply. And both were found to be positively related with FDI. We also assess the effect of all monetary policy variable on FDI as a whole runing multiple regression but we dont found any significant relationship between these.

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Here in all cases we see there is no significant relationship between FDI and Monetary Policy. Even separately each variables has no impact on FDI. So here Bangladesh Bank Seriously failed to stimulate the FDI through monetary policy tools through they were a bit successful in stabilizing economy. In our literature review we have found in developed countries even developing countries monetary policy designed to stimulate growth and stability which in turn facilitate FDI. As a developing country we seriously need foreign capital to sustain our growth. We have planned to be middle income earnings country within this decade but this vision would not be come true if we can not facilitate FDI. On the other hand our capital market also failed to attract foreign capital here monetary policy has a big hand. So Bangladesh Bank should address it immediately in formulating monetary policy statements. The empirical exercise presented in this paper fails to consider many potentially relevant policy measures because of data limitations. Going forward, expanding the set of policy variables included in the empirical exercise may yield useful insights.

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Appendix A Dependent Variable FDI (Y) Independent Variables MB(X 1) 10957. 50 10953. 80 11204. 90 12556. 70 13795. 60 15414. 50 17099. 40 19494. 40 20563. 70 21427. 60 23846. 00 27364. 30 33904. 10 39361. 00 47455. 20 62608. 20 73933. 40 89534. 60 97558. 80 10594 3.30 Credit to Private (X2) 20972.40 30650.90 35060.60 38931.80 44190.00 50316.30 55620.10 64671.30 73546.00 82885.90 94628.00 110674.00 130887.50 150601.00 188439.00 215905.40 268172.00 337569.10 404302.90 426578.80 Inflatio n (X3) 5.31 10.30 2.38 3.96 8.66 7.06 2.79 1.94 2.79 4.38 5.83 6.48 7.16 7.20 9.94 6.66 7.31 8.80 10.62 8.19 FX Reserve (X4) 2410.81 3069.60 2038.60 1718.80 1739.20 1523.30 1602.10 1306.70 1582.90 2469.60 2705.00 2930.00 3483.80 5077.20 6148.80 7470.90 10749.70 10911.60 10364.40 13848.30 Exchange Rate (X5) 40.00 40.20 40.84 42.70 45.46 48.06 50.31 53.96 57.43 57.90 58.94 61.39 67.08 69.03 68.60 68.80 69.18 71.17 79.10 80.85 Interest rate (X6) 14.50 14.00 14.00 14.00 14.00 14.13 15.50 15.83 16.00 16.00 14.75 14.00 15.33 16.00 16.38 14.60 13.00 13.25 13.77 13.73

Peri od 1993 -94 1994 -95 1995 -96 1996 -97 1997 -98 1998 -99 1999 -00 2000 -01 2001 -02 2002 -03 2003 -04 2004 -05 2005 -06 2006 -07 2007 -08 2008 -09 2009 -10 2010 -11 2011 -12 2012 -13

804.00 730.00 1516.00 366.85 603.30 394.10 383.22 563.92 393.76 379.18 284.16 803.78 744.61 792.74 768.69 960.59 913.02 779.04 699.86 650.00

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Appendix B

Period 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Dependent Variable FDI (Y) 6.69 6.59 7.32 5.90 6.40 5.98 5.95 6.33 5.98 5.94 5.65 6.69 6.61 6.68 6.64 6.87 6.82 6.66 6.55 6.48

Data Arrangement for Analysis Log Transformation Independent Variables MB(X1) Credit to Private (X2) Inflation (X3) FX Reserve (X4) Exchange Rate (X5) Interest rate (X6) 9.30 9.95 5.31 7.79 3.69 14.50 9.30 10.33 10.30 8.03 3.69 14.00 9.32 10.46 2.38 7.62 3.71 14.00 9.44 10.57 3.96 7.45 3.75 14.00 9.53 10.70 8.66 7.46 3.82 14.00 9.64 10.83 7.06 7.33 3.87 14.13 9.75 10.93 2.79 7.38 3.92 15.50 9.88 11.08 1.94 7.18 3.99 15.83 9.93 11.21 2.79 7.37 4.05 16.00 9.97 11.33 4.38 7.81 4.06 16.00 10.08 11.46 5.83 7.90 4.08 14.75 10.22 11.61 6.48 7.98 4.12 14.00 10.43 11.78 7.16 8.16 4.21 15.33 10.58 11.92 7.20 8.53 4.23 16.00 10.77 12.15 9.94 8.72 4.23 16.38 11.04 12.28 6.66 8.92 4.23 14.60 11.21 12.50 7.31 9.28 4.24 13.00 11.40 12.73 8.80 9.30 4.27 13.25 11.49 12.91 10.62 9.25 4.37 13.77 11.57 12.96 8.19 9.54 4.39 13.73

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