Abstract
Inflation has a substantial impact on an economy because it affects the financial value of money and stability in the economy. Government and non-govern- ment policies might be hindered due to the excessive rate of inflation. This paper aims to model and forecast inflation by the Box-Jenkins autoregressive integrated moving average (ARIMA) technique using annual time series data on inflation from 1987 to 2017 in Bangladesh. It is found that ARIMA (2, 1, 0) model is the best optimal to forecast inflation for a period of up to eight years. Graphical tools, as well as theoretical tests such as Ljung-Box, Shapiro-Wilk, and runs tests have been used in the model diagnostics.
Highlights
Inflation which refers to the purchasing power of money is one of the most perpetual economic challenges in the world, for the developing economies [1] [2]
This paper aims to model and forecast inflation by the Box-Jenkins autoregressive integrated moving average (ARIMA) technique using annual time series data on inflation from 1987 to 2017 in Bangladesh
Though Islam [29] and Habibah et al [4] attempted recently to forecast inflation by ARIMA (1, 0, 0) and ARIMA (3, 0, 0) models respectively, but their prediction slides the reality as we found the actual inflation rate obtained from Bangladesh Bureau of Statistics (BBS) differ substantially in the subsequent years
Summary
Inflation which refers to the purchasing power of money is one of the most perpetual economic challenges in the world, for the developing economies [1] [2]. Inflation has a substantial impact on the economy of a country because high inflation distorts level of price, discourages investment and hinders economic development. Controlling inflation or maintaining low inflation is critical to protecting the purchasing power of the poor, in particular food-price, in developing countries [3]. Inflation badly affects many economic indicators such as money supply, tax revenues, government expenditures, exports imports, gross domestic products (GDP), exchange rate, stock and bond returns, and others [4]. Inflation may be a non-ignorable problem if it goes out of control in a develop-
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