Abstract
The study analyzed the impact of exchange rate, money supply, interest rate and government expenditure on inflation of Bangladesh by using time series data from 1976-2010 by employing Bound Testing approach. The analysis demonstrates that in the long-run, rate of change of exchange rate has negative effect on inflation. Money supply and interest rate have no significant effect on inflation, and government expenditure has a positive effect on inflation. While in the short-run, the results indicate directional causality taking inflation as dependent variable with other macro-economic variables like exchange rate, money supply, interest rate and government expenditure. It is manifest that inflation is sensitive to changes both interest rate and government expenditure in the short run. Therefore, the government should realise effective macro-economic policies that is effective for economical progress in the short run. The policy implication is that in Bangladesh to lessen inflation momentum the government will have to pursue a monetary and fiscal policy which matches with the actual scenario of real sectors and monetary sectors.
Highlights
The emergence of substantial inflation figure in Asia and Bangladesh in particular has led to widespread studies about its causes
The results suggest that exchange rate has negative effect on inflation, money supply and interest rate have no significant effect on inflation, and government expenditure has positive effect on inflation
This paper has estimated the impact of exchange rate, money supply, interest rate and government expenditure on inflation of Bangladesh by using time series data from 19762010 by employing Bound Testing approach
Summary
The emergence of substantial inflation figure in Asia and Bangladesh in particular has led to widespread studies about its causes. Long term inflation occurs when the money supply grows at a faster rate than the output of goods and services. This situation occurs when there is more money than is needed to accommodate nominal growth in output, consumers and businesses want to purchase more goods and services than can be produced with current resources (labor, materials, etc.) causing upward pressures on prices. E. increase or decrease in the money supply and interest rate), fiscal policy (changes in the amount of taxes and government spending) and various controls on prices, tariffs, etc. Studies reveal growth in money supply, government deficit financing and exchange rate decreased agricultural and industrial production among other were responsible for inflationary pressure in Bangladesh. The paper is to investigate into the root causes of inflation in Bangladesh
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