Munich Personal RePEc Archive

How the banking system is creating a two-way inflation in an economy?

Mehedi Nizam, Ahmed (2018): How the banking system is creating a two-way inflation in an economy?

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Abstract

Here we argue that due to the difference between the real GDP growth rate and nominal deposit rate, a demand pull inflation is induced into the economy. On the other hand, due to the difference between real GDP growth rate and nominal lending rate, a cost push inflation is created. We quantitatively measure the amount of nominal interest income the depositors spend on each unit of consumed goods and the amount of nominal interest expense the borrowers pay on each unit of produced goods which is not supported by the accompanying real GDP growth rate and thereby causing inflation in the economy. We examine the process of creating two-fold inflation by the interplay between real GDP growth rate and nominal deposit and lending rate and provide two metrics that tend to link the overall inflation prevailing at any point of time in an economy to the nominal deposit and lending rate in the long run. We compare the performance of our model to the Fisherian one by using Toda and Yamamoto approach of testing Granger Causality in the context of non-stationary data. We then use ARDL Bounds Testing approach to cross-check the results obtained from T-Y approach.

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