Determinants of Inflation in Bangladesh: An Empirical Investigation

Abstract

The study analyzed the major determinants of inflation in Bangladesh using data for the period from 1978 to 2010. The study employed Johansen-Juselius cointegration methodology to test for the existence of a long run relationship between the variables. The cointegrating regression considers only the long-run property of the model, and does not deal with the short-run dynamics explicitly. For this, the error correction from the long run determinants of inflation is then used as a dynamic model to estimate the short run determinants of inflation. The study concluded that the GDP, broad money, government expenditure and import have a positive effect on the inflation in long run. On the other hand, government revenue and export have a negative effect. The government expenditure coefficient is 0.466 and the money supply coefficient is 0.337, implying a one percent increase in government expenditure and one percent increase in money supply elicit 0.466% and 0.337% increase in inflation respectively. In the short-run money supply has been found to be major factor influencing inflation in the country.

Key words: cointegration, error correction model, broad money.