Determinants of Inflation in Bangladesh: An Empirical Investigation
Journal of Economics and Sustainable Development ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.3, No.12, 2012
www.iiste.org
Determinants of Inflation in Bangladesh: An Empirical Investigation
1. 2. Kazi Mostafa Arif1* Munshi Murtoza Ali2 Assistant Professor, Department of Economics, Islamic University, Kushtia 7003, Bangladesh. Assistant Professor, Department of Politics and Public Administration, Islamic University, Kushtia 7003, Bangladesh. *E-mail of corresponding: arifeconomics@yahoo.com
Abstract The study analyzed the major determinants of inflation in Bangladesh using data for the period from 1978 to 2010. The study employed Johansen-Juselius cointegration methodology to test for the existence of a long run relationship between the variables. The cointegrating regression considers only the long-run property of the model, and does not deal with the short-run dynamics explicitly. For this, the error correction from the long run determinants of inflation is then used as a dynamic model to estimate the short run determinants of inflation. The study concluded that the GDP, broad money, government expenditure and import have a positive effect on the inflation in long run. On the other hand, government revenue and export have a negative effect. The government expenditure coefficient is 0.466 and the money supply coefficient is 0.337, implying a one percent increase in government expenditure and one percent increase in money supply elicit 0.466% and 0.337% increase in inflation respectively. In the short-run money supply has been found to be major factor influencing inflation in the country. Key words: cointegration, error correction model, broad money. 1. Introduction One of the most enduring debates in economics is whether demand side factors (a consequence of increased economic activity) or supply side factors (due to increased cost) cause inflation. Milton Friedman (1963) wrote Inflation is always and everywhere a monetary phenomenon. The Quantity
www.iiste.org
Determinants of Inflation in Bangladesh: An Empirical Investigation
1. 2. Kazi Mostafa Arif1* Munshi Murtoza Ali2 Assistant Professor, Department of Economics, Islamic University, Kushtia 7003, Bangladesh. Assistant Professor, Department of Politics and Public Administration, Islamic University, Kushtia 7003, Bangladesh. *E-mail of corresponding: arifeconomics@yahoo.com
Abstract The study analyzed the major determinants of inflation in Bangladesh using data for the period from 1978 to 2010. The study employed Johansen-Juselius cointegration methodology to test for the existence of a long run relationship between the variables. The cointegrating regression considers only the long-run property of the model, and does not deal with the short-run dynamics explicitly. For this, the error correction from the long run determinants of inflation is then used as a dynamic model to estimate the short run determinants of inflation. The study concluded that the GDP, broad money, government expenditure and import have a positive effect on the inflation in long run. On the other hand, government revenue and export have a negative effect. The government expenditure coefficient is 0.466 and the money supply coefficient is 0.337, implying a one percent increase in government expenditure and one percent increase in money supply elicit 0.466% and 0.337% increase in inflation respectively. In the short-run money supply has been found to be major factor influencing inflation in the country. Key words: cointegration, error correction model, broad money. 1. Introduction One of the most enduring debates in economics is whether demand side factors (a consequence of increased economic activity) or supply side factors (due to increased cost) cause inflation. Milton Friedman (1963) wrote Inflation is always and everywhere a monetary phenomenon. The Quantity
References: 16 Journal of Economics and Sustainable Development ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.3, No.12, 2012 www.iiste.org Annex table 1: Data Sheet Real GDP is calculated at 1995-96 constant market prices, while the base year for CPI inflation is 1995-96, i.e., 1995-96 = 100