Does Money Supply Matter for Inflation in Bangladesh? An ARDL Investigation

Abstract

Purpose of the study: Inflation is currently a persistent economic problem in Bangladesh. The intention of this research is to figure out whether money supply is the source of inflation in the long-run and short-run in the context of Bangladesh's changing macroeconomic environment throughout 1986 and 2021. 

Methodology: For the investigation, the augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests are employed to investigate the stationarity of the variables, while the auto-regressive distributed lag (ARDL) model is utilized to estimate the long-run and short-run effects. Eviews-10 software is used to analyze the annual time series data.

Findings: When corrected for inflation, the F-bound test reveals that the variables (broad and narrow money supply, gross domestic product, and exchange rate) exhibit a single long-run cointegration relationship. The study's long-run impacts show that broad and narrow money supplies have a positive and significant influence on inflation. The short-run error correction model, on the other hand, demonstrates that the rate of adjustment is extremely rapid (approximately 97 percent), which is negative and significant at the 1 percent level of significance.

Implications: According to the research, the money supply contributes to increasing inflation in Bangladesh. To combat inflation, the research recommends that the Bangladesh government should undertake fiscal and monetary measures, implement exchange rate and import restriction regulations, improve fiscal discipline, address supply-side constraints, and collaborate with international organizations.

Limitations and Future direction: Future studies can use different econometric methods to retest the results in similar economic situations. Moreover, the addition of new independent variables such as government expenditure, tax rate, interest rate, etc. can explore new dimensions.