Inflation Dynamics of Bangladesh: An Empirical Analysis

Abstract

This study investigated the factors which contributed to inflation in Bangladesh from 1986 to 2021. The study also explored the presence of a long-run relationship among inflation (denoted by Consumer Price Index), GDP, broad money supply, and exchange rate. Johansen cointegration test confirmed no long-run relationship among those selected variables in Bangladesh. I also employed Vector Auto Regression (VAR) method to reveal the causal relationship among them. The estimated result confirms that one period lagged of inflation and money supply positively affect inflation, which is significant. While the current period’s inflation is negatively affected by the last period’s GDP and exchange rate, these effects are not statistically significant. Additionally, last year’s inflation, GDP, and money supply have a positive effect on the current period’s GDP.