Investigating the determinants of inflationary trends in Bangladesh: an ARDL bounds F-Test Approach

Abstract

Inflation appears to have emerged as a perennial phenomenon in Bangladesh in the recent past. High inflationary trend that began to show up since the second quarter of FY2010 continued throughout FY2011 and FY2012. In this regard, an empirical examination to explore the major sources of inflation is necessary for effective policy suggestions towards curbing inflationary pressure, ensuring price stability and attaining the desired economic growth. This paper investigates major determining factors of inflationary trends in Bangladesh during the period FY1981 to FY2009. An unrestricted error-correction model (UECM) version auto-regressive distributed lag (ARDL) bounds F-test is employed to find out the short run and long run elasticities of the determinants of inflation. Empirical result reveals that domestic rice production affects inflation negatively in the short run to a significant extent. Conversely, domestic petroleum price and broad money (M2) supply have low but positive impact on inflationary trends. This suggests that increased domestic rice production and effective fiscal-monetary integration are the crucial policy options to curb the inflationary pressure in Bangladesh