Deficit Financing and Inflation in Bangladesh: A Vector Autoregressive Analysis

Kreiter, Zebulun and Paul, Tapas Kumar (2010): Deficit Financing and Inflation in Bangladesh: A Vector Autoregressive Analysis. Published in: The Jahangirnagar Economic Review , Vol. 21, (2010): pp. 9-26.

Abstract

This paper analyses the dynamics of inflation in Bangladesh using vector autoregressive methods over the period from July 1999 to August 2008. Demand side factors are assessed in comparison with cost-push influences with a particular focus on the role of government borrowing from the domestic banking system. Over the sample period, previous values of inflation are the most significant source of inflation in the short-term, followed by net credit to the government. The results suggest that the management of expectations and the mode of budget financing are the most important focus areas for future price stability efforts.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation; Bangladesh; deficit financing; vector autoregressive model
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems

References

Ahmed, Mudabber and U.L.G. Rao (2006). Vector Autoregression Evidence on Monetarism: A Focus on Some Developing Economies in South Asia. The Singapore Economic Review, 51(1), pp. 53-66.

Ahmed, S. and E. Islam (2006). The Monetary Transmission Mechanism in Bangladesh: Bank Lending and Exchange Rate Channels. Working Paper Series, WP0702, 2(2), Bangladesh Bank: Policy Analysis Unit.

Alavirad, A. and S. Athawale (2005). The Impact of the Budget Deficit on Inflation in the Islamic Republic of Iran. OPEC Review, 29(1), pp. 37-49.

Akhtaruzzaman, M. (2005). Inflation in the Open Economy: An Application of the Error Correction Approach to the Recent Experience in Bangladesh. Working Paper Series, WP0602, 1(2), Bangladesh Bank: Policy Analysis Unit.

Catao, L. and M.E. Terrones (2005). Fiscal Deficits and Inflation. Journal of Monetary Economics, 52(3), pp. 529-554.

Chowdhury, A.R., M.Q. Dao and A.N.M. Wahid (1995). Monetary Policy, Output and Inflation in Bangladesh: A Dynamic Analysis. Applied Economic Letters, 2(3), pp. 51-55.

Chaudhary, M.A. and N. Ahmad (1995). Money Supply, Deficit and Inflation in Pakistan. The Pakistan Development Review, 34(4), pp. 945-956.

Chowdhury, K. (2004). Deficit Financing in LDCs: Evidence From South Asia. Economics Working Papers, University of Wollongong, Working Paper 04-18.

DeSerres, Alain and Alain Guay (1995). “Selection of the truncation lag in Structural VARs (or VECMs) with Long-Run Restrictions”, Working Paper 95-9, International Department, Bank of Canada.

Fischer, Stanley, Ratna Sahay, and Carlos Vegh (2002). Modern Hyper- and High Inflations. Journal of Economic Literature, 40, pp. 837-80.

Genberg, H., M.K. Salemi, and A. Swoboda (1987). The relative importance of foreign and domestic distrubances for aggregate fluctuations in the open economy, Switzerland 1964-81. Journal of Monetary Economics, 19, pp. 45-67.

Gujarati, D.N. (2004). Basic Econometrics. McGraw-Hill Publishers, New York, NY.

Hamburger, M.J. and B. Zwick (1981). Deficit, Money and Inflation. Journal of Monetary Economics, 7(1), pp. 141-150.

Hamilton, J.D. (1994). Time Series Analysis. Princeton University Press, Princeton, NJ.

Islam, E., M.K. Mujeri and A.S. Sarkar (2008). Monetary Policy Stance and Recent Movements in Monetary Aggregates: Policy Implications. Policy Paper Series, PP 0902, 2(2), Bangladesh Bank: Policy Analysis Unit.

Johansen, S. (1996). Likelihood Based Inference in Cointegrated Vector Autoregressive Models. Advanced Texts in Econometrics, Oxford University Press, Oxford.

Jones, J.D. and Z. Sattar (1988). Money, Inflation, Output, and Causality: The Bangladesh Case, 1974-1985. The Bangladesh Development Studies, 16(1), pp. 73-83.

Khan, M.S. and A. Schimmelpfennig (2006). Inflation in Pakistan: Money or Wheat? IMF Working Paper, WP/06/60, International Monetary Fund: Middle East and Central Asia Department.

Komulainen, T. and J. Pirttilä (2002). Fiscal Explanations for Inflation: Any Evidence from Transition Economies?. Economics of Planning, 35(3), pp. 293-316.

Loungani, P. and P. Swagel (2001). Sources of Inflation in Developing Countries. IMF Working Paper, WP/01/198, International Monetary Fund: External Relations Department and Western Hemisphere Department.

Majumder, M.A. (2006). Inflation in Bangladesh: Supply Side Effects. Policy Notes Series, PN 0705, 2(5), Bangladesh Bank: Policy Analysis Unit.

Maysami, R.C. and T.S. Koh (2000). A Vector error correction model of the Singapore stock market. International Review of Economics and Finance, 9(1), pp. 79-96.

Metin, K. (1998). The Relationship between Inflation and the Budget Deficit in Turkey. Journal of Business and Economic Statistics, 16(4), pp. 412-422.

Mortaza, M.G. (2006). Sources of Inflation in Bangladesh: Recent Macroeconomic Experience. Working Paper Series, WP 0704, 2(4), Bangladesh Bank: Policy Analysis Unit.

Mortaza, M.G. and H. Rahman (2008). Transmission of International Commodity Prices to Domestic Prices in Bangladesh. Working Paper Series, WP 0807, 3(7), Bangladesh Bank: Policy Analysis Unit.

Ng, S. and P. Perron (2005). A Note on the Selection of Time Series Models. Oxford Bulletin of Economics and Statistics, 67(1), pp. 115-134.

Parikh, A. and C. Starmer (1988). The Relationship between the Money Supply and Prices in Bangladesh. The Bangladesh Development Studies, 16(3), pp. 59-70.

Piontkivsky, R., A. Bakun, M. Kryshko, and T. Sytnyk (2001). The Impact of the Budget Deficit on Inflation in Ukraine. Research Report, International Centre for Policy Studies.

Rahman, M., D. Bhattacharya, W.B. Shadat and U. Deb (2008). Recent Inflation in Bangladesh: Trends, Determinants and Impact of Poverty. Centre for Policy Dialogue, Dhaka.

Sargent, T. and N. Wallace (1981). Some Unpleasant Monetarist Arithmetic. Quarterly Review of the Federal Reserve Bank of Minneapolis, 5(Fall), pp. 1-17.

Solomon, M and W.A. de Wet. The Effect of a Budget Deficit on Inflation: The Case of Tanzania. South African Journal of Economic and Management Sciences, 7(1), pp. 100-116.

Tang, T.C. (2001). Bank Lending and Inflation in Malaysia: Assessment from Unrestricted Error-Correction Models. Asian Economic Journal, 15(3), pp. 275-289.

Taslim M.A. (1982). Inflation in Bangladesh: A Reexamination of the Structuralist-Monetarist Controversy. The Bangladesh Development Studies, 10(1), pp. 23-52.

Wooldridge, J. (2005). Introductory Econometrics: A Modern Approach, 3rd Edition. Southwestern College Publishing, Boston, MA.