Munich Personal RePEc Archive

Global Commodity Price Volatility and Domestic Inflation: Impact on the Performance of the Financial Sector in Bangladesh

Hossain, Monzur and Rafiq, Farhana (2012): Global Commodity Price Volatility and Domestic Inflation: Impact on the Performance of the Financial Sector in Bangladesh.

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Abstract

Overall inflation in Bangladesh saw a surge in inflation rate amid rising trend of global commodity prices in the last few years. Inflation in 2009 was 6.66 percent and 7.31 percent in 2010. As higher inflation might have detrimental impact on different sectors, this study aims to assess the impact of inflation on the performance of the financial sector in Bangladesh. Descriptive analysis suggests that moderate inflation (e.g., 6-7%) is favourable for the development of the financial sector, while very low or high inflation has detrimental effect on the financial sector performance. The analysis also suggests that the impact of inflation on the financial sector might be non-linear and there exists threshold effect of inflation. Therefore, we apply the non-linear Threshold ARCH model to the aggregate time series (monthly) data of bank’s performance indicators (assets, deposits and private credit) as well as capital market indicators (market capitalization, issued capital and turnover) for the period 1990-2010. The results suggest that inflation has negative long-term effect on the performance of the financial sector in Bangladesh. The analysis broadly suggests that increasing management and operational efficiency and prudent regulatory and institutional framework might help the financial sector to overcome the negative effect of rising inflation on the performance of the financial sector.

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