Understanding the Relationship between Inflation and Growth: A Wavelet Transformation Approach in the Case of Bangladesh

16 Pages Posted: 13 Sep 2017

See all articles by Gazi Salah Uddin

Gazi Salah Uddin

Linkoping University - Department of Management and Engineering Division

Ahmed Taneem Muzaffar

Independent

Mohamed Arouri

Université Côte d'Azur

Bo Sjö

Linkoping University

Date Written: September 2017

Abstract

This paper re‐examines the relationship between inflation and economic growth in developing countries. Both the theoretical and the empirical literature are extremely divided on this issue. We apply a relatively new empirical technique – the continuous wavelet transform – to Bangladesh. Bangladesh is of interest because of its remarkable economic growth and poverty reduction during the last 30 years in combination with, for a developing country, a controlled inflation. The wavelet analysis is a contribution because it displays how the correlation and the lead–lag structure between variables change over timescales, taking into account that growth and inflation can follow several different cycles. Comovements between variables are generally studied in the time domain. Results from studies in the time‐domain study can be sensitive to the frequency of observations. On the other hand, studies in the frequency domain are not easily translated into time domains that can be associated with economic policies. The wavelet methodology finds a balance between time and frequency domains. Our study finds that growth Granger causes inflation at all frequency scales, starting from the short run to the very long run. Inflation, on the other hand, Granger causes growth in the long run but not in the short run. This result has implications for Bangladesh, and as such for similar developing countries, where some policymakers believe that inflation must be kept at very low levels for sustained economic growth.

Suggested Citation

Uddin, Gazi Salah and Muzaffar, Ahmed Taneem and Arouri, Mohamed and Sjö, Bo, Understanding the Relationship between Inflation and Growth: A Wavelet Transformation Approach in the Case of Bangladesh (September 2017). The World Economy, Vol. 40, Issue 9, pp. 1918-1933, 2017. Available at SSRN: https://ssrn.com/abstract=3036148 or http://dx.doi.org/10.1111/twec.12429

Gazi Salah Uddin (Contact Author)

Linkoping University - Department of Management and Engineering Division ( email )

Linköping, 581 83
Sweden

Ahmed Taneem Muzaffar

Independent ( email )

No Address Available

Mohamed Arouri

Université Côte d'Azur ( email )

France

Bo Sjö

Linkoping University ( email )

Överstegatan 30
Linkoping, 581 83
Sweden

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