Causality Analysis between Inflation, Budget Deficit and Money Supply: Empirical Evidence from Bangladesh

World Journal of Social Sciences, Vol. 8, No. 3, pp. 94-109, September 2018

16 Pages Posted: 10 Nov 2018

See all articles by Muntasir Murshed

Muntasir Murshed

Bangladesh Institute of Development Studies (BIDS); Centre for Policy Dialogue; North South University - Department of Economics, Students

Sakib Amin

North South University

Meem Hasin Chadni

Meem Hasin Chadni

Date Written: 2018

Abstract

Developing countries across the globe have always shared the misfortune of being unable to finance their proposed government expenditures using their public revenues. As a result, a budget deficit is a common feature of all underdeveloped nations, to which Bangladesh is no exception. Conventional economic notion asserts that rising gap between government’s expenditure and revenue creates pressure to enhance money supply in the economy which in turn may trigger the domestic rate of inflation. In addition, monetary policy tools are also referred to be ineffective in controlling domestic inflation. Thus, the objective of the paper is to identify the causal relationships between Inflation, money supply and budget deficit in the context of Bangladesh incorporating relevant data from 1980 to 2014. Granger Causality test and Vector Error-Correction Model approach was used to identify the long-run and short-run causalities between the variables. The results coincide with the conventional economic conjecture as a unidirectional causality is found to be running from budget deficit to inflation in the short-run while no causality is found between money supply and inflation in both the short-run and the long-run.

Suggested Citation

Murshed, Muntasir and Amin, Sakib and Chadni, Meem Hasin, Causality Analysis between Inflation, Budget Deficit and Money Supply: Empirical Evidence from Bangladesh (2018). World Journal of Social Sciences, Vol. 8, No. 3, pp. 94-109, September 2018, Available at SSRN: https://ssrn.com/abstract=3268946

Muntasir Murshed (Contact Author)

Bangladesh Institute of Development Studies (BIDS) ( email )

E-17, Agargao, Shere Bangla Nagar
Dhaka, 1207
Bangladesh

Centre for Policy Dialogue ( email )

Dhaka
Bangladesh
+8801674873708 (Phone)

North South University - Department of Economics, Students ( email )

Dhaka 1213, Dhaka 1209
Bangladesh
+8801674873708 (Phone)

HOME PAGE: http://https://www.linkedin.com/in/muntasir-murshed-4b6b46151/

Sakib Amin

North South University ( email )

15 Ariful Haque Chowdhury Rd
Bashundhara Residential Area
Bangladesh, Dhaka 1229 1229
Bangladesh

Meem Hasin Chadni

Meem Hasin Chadni ( email )

NSU Campus, Bashundhara
Bangladesh, Dhaka 1213
India

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