Topics: Inflation, Central bank, Monetary policy Pages: 14 (4499 words) Published: August 30, 2013
BANGLADESH RESEARCH PUBLICATIONS JOURNAL ISSN: 1998-2003, Volume: 8, Issue: 1, Page: 07-17, January - February, 2013

Mohammad Zoynul Abedin1*, Fahmida – E – Moula2 and Shahnaz Parvin1*

Mohammad Zoynul Abedin1*, Fahmida – E – Moula2 and Shahnaz Parvin (2013). Inflation Behavior: Evidence from Bangladesh. Bangladesh Res. Pub. J. 8(1): 07-17. Retrieve from

The rise in the inflation rate has prompted two views of the sources of higher inflation in Bangladesh. One is the cost-push inflation which is typically caused by supply shocks such as flood, draught and oil price hike. The other is the demand-pull inflation that occurs when the aggregate demand (AD) in an economy outpaces the aggregate supply (AS). This article has two objectives: first, it identifies the leading source of the current inflationary pressure in Bangladesh using economic data. Second, it argues that more aggressive concretionary monetary policy is needed to pull down the inflation rate. The results indicate to maintain price stability; the government must work on both economic and non-economic factors that have instigated the ongoing inflation. It would be important to address the sources underlying slow domestic demand and take steps to counter their adverse impacts. At the same time, the Bangladesh Bank needs to identify the factors contributing to monetary expansion, assess the extent of the problem, and design appropriate policy mix consistent with current situations.

Key words: Evidence and Inflation Behavior.

Inflation has become a well-entrenched phenomenon in many countries. Somehow it seems that the general price level can only rise implying that there is an inflationary bias in society. Consensus has it that inflation is likely to impose considerable economic costs (Fischer and Modigliani, 1978). Types of costs are, for instance, menu costs, the decrease in real money balances and decreased efficiency of the price system. There is, however, a lack of understanding of the process which systematically generates inflation (Davis, 1991). One of the central objectives of traditional monetary policy is inflation control since the belief is that, among others; low inflation helps to improve resource allocation and fosters rapid and stable economic growth. The view also holds that inflation is primarily a monetary phenomenon so that low inflation is to be achieved mainly through aggregate demand control by pursuing concretionary monetary (and fiscal) policies. It is argued that these policies should also be supported by liberalization, privatization, and other macroeconomic reforms to create a more open and competitive economy driven by the private sector. In short, the argument is that there exists a tradeoff between inflation and growth (alternatively between inflation and unemployment) that makes inflation targeting as the dominant *Corresponding Author’s email:

1 Assistant Professor, Department of Finance and Banking, Hajee Mohammad Danesh Science and Technology University Dinajpur – 5200, Bangladesh 2 Student, Master of Social Science, Department of Sociology, University of Chittagong, Chittagong-4331. 5200, Bangladesh

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paradigm in monetary policy. Macroeconomists and central bankers pay close attention to inflation behavior, both in their theoretical debates and in empirical studies. The importance of inflation behavior results from the fact that they influence the behavior of economic agents, i.e., in terms of consumption, savings and investment decisions. Moreover, to the extent that they provide an unbiased predictor of future inflation, quantitative measures of expected inflation may constitute an important information variable taken into account in forwardlooking considerations and monetary policy decisions (Forsells and Kenny, 2002a)....

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