Determinants of Inflation: Evidence From Bangladesh

Abstract

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, 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. 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. Therefore, the government should realise effective macro-economic policies. 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.