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The Relationship Between Inflation and Economic Growth of Bangladesh: An Empirical Analysis from 1961 to 2013

Received: 13 August 2015     Accepted: 28 August 2015     Published: 8 September 2015
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Abstract

The link between inflation and economic growth is one of the most important controversies in the economic literature. 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 Gross Domestic Product Deflator (GDPD) for the period of 1961 to 2013, an assessment of empirical evidence has been acquired through the co-integration test, error correction models and Granger Causality test. The empirical evidence demonstrates that there exists a statistically significant long-run negative relationship between inflation and economic growth for the country as indicated by a statistically significant long-run negative relationship running from Gross Domestic Product Deflator (GDPD) to GDP. Again the empirical evidence demonstrates also that there exists a statistically significant long-run positive causality running from GDP to Gross Domestic Product Deflator (GDPD). In addition, economic growth affects inflation positively. But when increase in the rate of inflation goes beyond the threshold inflation level then inflation affects economic growth negatively. The paper discusses the important policy implications of the results.

Published in International Journal of Economics, Finance and Management Sciences (Volume 3, Issue 5)
DOI 10.11648/j.ijefm.20150305.13
Page(s) 426-434
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2015. Published by Science Publishing Group

Keywords

Inflation, Economic Growth, Bangladesh, Cointegration, Granger Causality

References
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[3] Sarel, M. (1996). Nonlinear Effects of Inflation on Economic Growth,” IMF WP/95/56, Washington.
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[5] Malla, S. (1997). Inflation and Economic Growth: Evidence from a Growth Equation. Mimeo, Department of Economics, University of Hawai’ I at Monoa, Honolulu. Available at www. hawaii. edu/~malla.
[6] Ghosh, A. and P. Steven (1998).Warning! Inflation May Be Harmful to Your Growth, IMF Staff Papers, 45(4), 672-710.
[7] Shitundu, J, L and Luvanda, E. G (2000). The Effect of Inflation on Economic Growth in Tanzania. African Journal of Finance and Management, Vol. 9-1.
[8] Nell, K. S. (2000). Is Low Inflation a Precondition for Faster Growth? The Case of South Africa. Working Paper No. 7.
[9] Faria, J. R. and Carneiro, F. G. (2001). Does High Inflation Affect Growth in the Long and Short-run? Journal of Applied Economics, Vol. IV, No. 1, pp. 89-105.
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[11] Khan, M. S. and Senhadji, A. S. (2001). Threshold Effects in the Relationship between Inflation and Growth, IMF Staff Papers, Vol. 48, No. 1.
[12] Gokal, V. and S. Hanif (2004).Relationship between Inflation and Economic Growth, Economics Department, Reserve Bank of Fiji, Suva, Fiji, Working Paper 2004/04.
[13] Sweidan, O. D. (2004). Does Inflation Harm Economic Growth in Jordan? An Econometric Analysis for the Period 1970-2000. International Journal of Applied Econometrics and Quantitative Studies, Vol. 1-2, pp. 41-66.
[14] Ahmed, S and M. G. Mortaza. (2005).Inflation and Economic Growth in Bangladesh: 1981-2005, Working Paper Series: WP 0604, Research Department, Bangladesh Bank, Dhaka, Bangladesh.
[15] Mubarik, Y. A. (2005). Inflation and Growth: An Estimate of the Threshold Level of Inflation in Pakistan,” State Bank of Pakistan – Research Bulletin, Vol. 1, No. 1-2, pp. 35-44.
[16] Khan, M. S. and Schimmelpfenning, A. (2006). Inflation in Pakistan. The Pakistan Development Review, 45(2), 185-202.
[17] Kemal, M. A. (2006).Is Inflation in Pakistan a Monetary Phenomenon? The Pakistan Development Review, 45(2), 213-220.
[18] Saaed, A. (2007). Inflation and Economic Growth in Kuwait: 1985-2005 Evidence from Cointegration and Error Correction Model’ Applied Econometrics and International Development Vol. 7-1.
[19] Tan, Eu Chye (2008). Inflation and Economic Growth in ASEAN-5, Japan and South Korea. In: 11th International Convention of the East Asian Economic Association, 15-16 November 2008, Manila. (Unpublished).
[20] Erbaykal, E. and Okuyan, H. A. (2008). Does Inflation Depress Economic Growth? Evidence from Turkey. International Research Journal of Finance and Economics, Issue 17, no. 1450-2887.
[21] Munir, Q. et al. (2009). Inflation and Economic Growth in Malaysia: A Threshold Regression Approach, ASEAN Economic Bulletin, 26(2), 180-193.
[22] Culver, E. S. and Papell, H. D. (1997). Pitfalls and Opportunities: What Macroeconomics Should Know about Unit Roots, in O. J. Blanchard and S. Fischer, eds., NBER Macroeconomics Annual 1991, Cambridge: MIT Press.
[23] Tobin, J. (1965)"Money and Economic Growth,” Econometrica, 33, pp. 671-684.
[24] De Gregorio, José. (1993). Effects of Inflation on Economic Growth: Lessons from Latin America. European Economic Review, Vol. 36 (April), pp. 417–25.
[25] Dickey, D. A. and Fuller, W. A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica, Vol. 49 (, pp. 1057-1072.
[26] Engle, R. F. and Yoo, B. S. (1991). Co-integrated Economic Time Series: An Overview with New Results in R. F. Engle and C. W. J. Granger, eds., Long-Run Economic Relationships, Oxford: Oxford University Press, pp. 237-266.
[27] Johansen, S. and K. Juselius. (1990). Maximum Likelihood Estimation and Inference on Co-integration with the Application to the Demand for Money. Oxford Bulletin of Economics and Statistics, Vol. 52, pp. 169-210.
[28] Kwiatkowski, D., Phillips, P., Schmidt, P., and Shin, Y. (1992). Testing the Null Hypothesis of Stationary against the Alternative of a Unit Root. Journal of Econometrics, Vol. 54, pp. 159-178.
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  • APA Style

    Md. Shakhaowat Hossin. (2015). The Relationship Between Inflation and Economic Growth of Bangladesh: An Empirical Analysis from 1961 to 2013. International Journal of Economics, Finance and Management Sciences, 3(5), 426-434. https://doi.org/10.11648/j.ijefm.20150305.13

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    ACS Style

    Md. Shakhaowat Hossin. The Relationship Between Inflation and Economic Growth of Bangladesh: An Empirical Analysis from 1961 to 2013. Int. J. Econ. Finance Manag. Sci. 2015, 3(5), 426-434. doi: 10.11648/j.ijefm.20150305.13

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    AMA Style

    Md. Shakhaowat Hossin. The Relationship Between Inflation and Economic Growth of Bangladesh: An Empirical Analysis from 1961 to 2013. Int J Econ Finance Manag Sci. 2015;3(5):426-434. doi: 10.11648/j.ijefm.20150305.13

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  • @article{10.11648/j.ijefm.20150305.13,
      author = {Md. Shakhaowat Hossin},
      title = {The Relationship Between Inflation and Economic Growth of Bangladesh: An Empirical Analysis from 1961 to 2013},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {3},
      number = {5},
      pages = {426-434},
      doi = {10.11648/j.ijefm.20150305.13},
      url = {https://doi.org/10.11648/j.ijefm.20150305.13},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20150305.13},
      abstract = {The link between inflation and economic growth is one of the most important controversies in the economic literature. 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 Gross Domestic Product Deflator (GDPD) for the period of 1961 to 2013, an assessment of empirical evidence has been acquired through the co-integration test, error correction models and Granger Causality test. The empirical evidence demonstrates that there exists a statistically significant long-run negative relationship between inflation and economic growth for the country as indicated by a statistically significant long-run negative relationship running from Gross Domestic Product Deflator (GDPD) to GDP. Again the empirical evidence demonstrates also that there exists a statistically significant long-run positive causality running from GDP to Gross Domestic Product Deflator (GDPD). In addition, economic growth affects inflation positively. But when increase in the rate of inflation goes beyond the threshold inflation level then inflation affects economic growth negatively. The paper discusses the important policy implications of the results.},
     year = {2015}
    }
    

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    T1  - The Relationship Between Inflation and Economic Growth of Bangladesh: An Empirical Analysis from 1961 to 2013
    AU  - Md. Shakhaowat Hossin
    Y1  - 2015/09/08
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    T2  - International Journal of Economics, Finance and Management Sciences
    JF  - International Journal of Economics, Finance and Management Sciences
    JO  - International Journal of Economics, Finance and Management Sciences
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    AB  - The link between inflation and economic growth is one of the most important controversies in the economic literature. 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 Gross Domestic Product Deflator (GDPD) for the period of 1961 to 2013, an assessment of empirical evidence has been acquired through the co-integration test, error correction models and Granger Causality test. The empirical evidence demonstrates that there exists a statistically significant long-run negative relationship between inflation and economic growth for the country as indicated by a statistically significant long-run negative relationship running from Gross Domestic Product Deflator (GDPD) to GDP. Again the empirical evidence demonstrates also that there exists a statistically significant long-run positive causality running from GDP to Gross Domestic Product Deflator (GDPD). In addition, economic growth affects inflation positively. But when increase in the rate of inflation goes beyond the threshold inflation level then inflation affects economic growth negatively. The paper discusses the important policy implications of the results.
    VL  - 3
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    ER  - 

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Author Information
  • Department of Finance and Banking, Begum Rokeya University, Rangpur, Bangladesh

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