Академический Документы
Профессиональный Документы
Культура Документы
Inflation has appeared to be a major strain on the economy of the country in the recent past.
Understanding the relationship between inflation and output growth is very crucial in setting the
targets of policy goals, inflation in particular and formulating the policy framework. Several
cross-country and single country studies on the issue indicate that the relationship between
inflation and output growth is not linear and there exist a threshold level of inflation, up to which
inflation appears to be helpful for economic growth and beyond which it appears to impede
growth. This simply means that likewise the cost of high inflation, keeping too low inflation is
also costly in terms of output loss. The objective of this study is to explore the inflation, causes
and its historical trends. In this regard, the current study makes an attempt to examine the
relationship between inflation and output growth to identify a realistic level of threshold level of
inflation in Bangladesh. It is widely believed that moderate and stable inflation rates promote the
development process of a country, and hence economic growth. Moderate inflation supplements
return to savers, enhances investment, and therefore, accelerates economic growth of the country.
This paper empirically explores the present relationship between inflation and economic growth
in the context of Bangladesh. Using annual data set on real GDP and CPI for the period of 1980
to 2014, specifically, our conclusion is of direct relevance to the conduct of the monetary policy
by the Bangladesh Bank.
Chapter - 1
Introduction
1.1 Introduction:
Inflation-targeting central banks frequently justify their narrow focus on inflation by arguing that
maintaining a low and stable rate of inflation is the best way for them to promote high
employment and output. Yet, neither mainstream economic theory nor existing empirical studies
offer much support for the belief that a country's real economic performance is significantly
improved by reducing the trend rate of inflation, except in extreme circumstances. Indeed,
reducing inflation too close to zero worsens economic performance because of downward
nominal wage rigidity. Moreover, too low a rate of inflation can result in real instability because
of the zero lower bound on nominal interest rates. Given the lack of support from economic
science, and because of the dangers posed by nominal wage rigidity and the zero lower bound,
inflation-targeting central banks are reluctant to reduce their targets below 2 or 3 percent.
However, the commonly acknowledged weakness of the micro foundations of mainstream
monetary theory leaves many wondering if there might still be significant costs of inflation that
theorists have not yet discovered.
1.3 Scope:
There were huge scopes to work in the area of this Case Study. Considering the dead line, and
exposure of the paper has been wide-ranging. The study The Growth-Inflation relationship in
Bangladesh has covered overall scenario of Central Banking and Monetary Policy situation of
Bangladesh. It has measured the living standard of mass people. We have a chance to work on
the economic variable used in modern economic world. By doing the assignment, we are able to
know that the importance of inflation, unemployment & growth trend to assess how the people of
the country living in. In the case study we have showed how the above variables are inter related
on each other.
1.4 Methodology:
We have used the concept of the course, information of the case study.
Sources of Data:
Here the secondary sources of information were used. The secondary sources are: Books and
Website.
Limitations:
While conducting the report on The Growth-Inflation relationship in Bangladesh, some
limitations were yet present there:
Because of time shortage many related area cant be focused in depth.
Website in different organization of Bangladesh contains poor information.
Recent data and information on different activities was unavailable.
Chapter-2
Growth-Inflation Relationship Inflation Causes & Data Analysis
2.1 Definition:
Too much money in circulation causes the money to lose value-this is the true meaning of
inflation. The popular opinion about the costs of inflation is that inflation makes everyone worse
off by reducing the purchasing power of incomes, eroding living standards and adding, in many
ways, to lifes uncertainties. In economics, inflation is a rise in the general level of prices of
goods and services in an economy over a period of time. Inflation refers to a rise in prices that
causes the purchasing power of a nation to fall. Inflation is a normal economic development as
long as the annual percentage remains low; once the percentage rises over a pre-determined
level, it is considered an inflation crisis. In another word Inflation means that your money wont
buy as much today as you could yesterday.
Negative Effect:
High or unpredictable inflation rates are regarded as harmful to an overall economy. They add
inefficiencies in the market, and make it difficult for companies to budget or plan long-term.
Inflation can act as a drag on productivity as companies are forced to shift resources away from
products and services in order to focus on profit and losses from currency inflation. Uncertainty
about the future purchasing power of money discourages investment and saving and inflation can
impose hidden tax increases. In case of international trade, Higher inflation in one economy
than another will cause the first economy's exports to become more expensive and affect the
balance of trade
Positive Effect:
Positive effects include ensuring central banks can adjust nominal interest rates (intended to
mitigate recessions), and encouraging investment in non-monetary capital projects. It puts impact
on Labor-market adjustments, Room to maneuver, Mundell-Tobin effect, Instability with
Deflation etc.
developing countries. There were different schools of thought as to the causes of inflation. Most
can be divided into two broad areas:
1. Quality theories of inflation
2. Quantity theories of inflation.
The quality theory of inflation rests on the expectation of a seller accepting currency to be able to
exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory
of inflation rests on the quantity equation of money that relates the money supply, its velocity,
and the nominal value of exchanges. Adam Smith and David Hume proposed a quantity theory
of inflation for money, and a quality theory of inflation for production.
After analyzing two theories of causes we have got here some physical cause to face which cover
both theories depending on a number of factors. These are given below-
Excess of money:
Inflation can happen when governments print an excess of money to deal with a crisis. As a
result, prices end up rising at an extremely high speed to keep up with the currency surplus. This
is called the demand-pull, in which prices are forced upwards because of a high demand.
Rise in production cost:
Another common cause of inflation is a rise in production costs, which leads to an increase in the
price of the final product. For example, if raw materials increase in price, this leads to the cost of
production increasing, which in turn leads to the company increasing prices to maintain steady
profits? Rising labor costs can also lead to inflation. As workers demand wage increases,
companies usually chose to pass on those costs to their customers.
1971
1972
1973
1974
1975
1976
1977
1978
-5.48
-13.97
3.33
9.59
-4.09
5.66
2.67
7.07
2.96
4.4
61.41
44.54
80.57
-17.63
-3.21
25.62
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
4.8
0.82
3.8
2.38
4.02
5.18
3.22
4.25
3.73
2.16
2.61
5.94
3.34
5.04
4.57
4.08
4.93
4.62
5.39
5.23
4.87
5.94
5.27
4.42
5.26
6.27
5.96
6.63
7.06
6.01
5.05
5.57
6.46
6.52
6.01
6.51
12.56
17.56
10.53
9.69
8.52
14.05
11.15
8
10.88
7.6
8.5
6.34
6.6
2.98
0.29
3.77
7.35
4.23
3.09
5.27
4.66
1.86
1.59
3.2
4.53
4.24
5.07
22.02
6.47
7.86
6.76
7.14
7.86
8.16
7.17
6.19
Average Growth
Rate
1.29
3.68
4.99
5.98
3.99
Average Inflation
rate
21.76
9.13
3.51
7.44
10.46
In view of visualizing the relationship between inflation and GDP growth in Bangladesh, several
Statistical tables and charts containing CPI inflation, real GDP during the period from 1971 to
2014 are used. The last row of Table-2 depicts the average inflation and growth of Real GDP for
four decades. After the liberation war in Bangladesh it was quite understandable that the rate of
inflation was higher and GDP growth was lower. From FY1971 to FY1981 the average inflation
rate was 21.76 percent that was reason of the lower GDP growth rate at 1.29 percent. It is seen
from the Table-1 that during the decade of FY82 to FY91, the inflation rate was around 9.13
percent, while the GDP growth was 3.68 percent. During the decade of FY92 to FY01, the CPI
inflation rate decreased significantly from around 10 percent to 3.51 percent, and the GDP
growth increased moderately to 4.99 percent from 3.68 percent. During the decade of FY02 to
FY14, however, the real GDP growth increased to around 6 percent, the CPI inflation also
increased to around 7.44 percent as well. From the table, it is evident that when money supply
was the highest (i.e., 22 percent), the inflation rate was much higher with lower real GDP
growth (i.e., around 4 percent). During the current decade, the state of inflation, real GDP
growth deem to be optimal as the average CPI inflation and real GDP growth both appeared to
be around 6 percent.
Chart 2: Relationship between average growth rate and inflation rate in last four decades
Chart 2: Average Growth- Average Inflation Relationship
FY 1971-1981
21.75
1.29
FY 1982-1991
9.12
3.67
FY 1992-2001
3.50
4.98
FY 2002-2013
6.14
6.02
Table-2 contains the data on inflation and real GDP growth in Bangladesh for the last 42 years
(1975-76 to 2011-12) in a way that various levels of GDP growth are recorded against a low-tohigh sequence of inflation levels. The recorded data show that when the rates of inflation are
around 20 percent the corresponding average GDP growth is around 1.50 percent in FY70s. It is
also seen from the table that when inflation rates are between 3 to 3.99 percent, the real GDP
growth is 5 percent. While inflation rates are in between 7 to 7.99 percent, the corresponding
average real GDP growth rate is one of the highest at 5.94 percent for 4 different years. Beyond
the 7.99 percent inflation, the average real GDP growth started to moderate. Thus the above
variety relationship between inflation and GDP growth indicates some sort of non-linearity with
a structural break or inflexion point when the relationship between inflation and GDP growth
switched.
Money supply is a moderate determinant of fluctuation in real output, at the same time; money
supply is a moderately strong determinant of fluctuation in nominal exchange rate in Bangladesh
during the period FY90-FY10.
Chapter 3
Conclusion
3. Conclusion:
These results have important policy implications for both domestic policy makers and the
development partners.
First, taking into consideration that the inflation rate is not indexed in the wages and salaries,
inflation will lead to a decrease in the purchasing power and an increase in the cost of living.
Second, given that the country frequently has to balance the credit requirements by the private
and public sector against both inflationary and balance of payments pressures, it is not always
possible for the monetary authority to increase (or adjust) the nominal interest rate above the
expected (or actual) inflation rate through contractionary monetary policy 11. In this regard, the
monetary authority can think of an alternative way by working on the expectations channel to
reduce inflation. This requires credibility of the monetary authority in following through its
monetary program as communicated in advance to the stakeholders.
References:
Chief economists unit and monetary department, Bangladesh bank Monetary Policy
Statement, July December 2014.
World Bank Website.
IMF Website.
Sadia Afrin, Fiscal Deficit and Inflation: The case of Bangladesh, July1, 2013.
The Innovators, Centre for research and action on development, Bangladesh Economic
Update Growth, Tax, Inflation and Consumers, July 2010.
The Innovators, Centre for research and action on development, Bangladesh Economic
Update Inflation Unemployment and Growth Trajectory, October 2010.
Shamim Ahmed and Md. Golam Mortaza, Inflation and Economic Growth of
Bangladesh: 1981-2005, December 2005.
Dr. Sayera Younus, Estimating Growth-Inflation tradeoff threshold in Bangladesh.
Quamrul Asraf, Peter Howitt and, Boris Greshman, How Ination A_ects
Macroeconomic Performance: An Agent-Based Computational Investigation June 2013.
The Financial Express, Inflation and food security in Bangladesh: Recent trends,
Anniversary Issue 2011.
Bangladesh Bureau of Statistics.