medium term forecasting of inflation rate in Bangladesh
ABSTRACT
This study examines the medium term forecasting of inflation rate in Bangladesh. Four important macroeconomic variables which have inter relationship among themselves are considered in the study and three different VEC models are estimated starting from a two-variable model including money supply and CPI, and sub-sequentially adding some financial variables such as real GDP and nominal exchange rates.
This paper empirically explores the present relationship between inflation and macroeconomic variables in the context of Bangladesh. Using annual data set on real GDP, money supply, nominal exchange rate and CPI for the period of fiscal year 1981 to 2010, an assessment of empirical evidence has been acquired through the co-integration, error correction models and forecasting. The analysis also uses variance decompositions (VDCs) and impulse response functions (IRFs) techniques. ADF test (unit root test), PP tests and KPSS tests are carried out to test the stationary and Jonansen test is used to test the cointegration. Normality test (Jarque-Bera test), serial correlation test (Portmanteau test) and ARCH (multivariate) test are used to diagnostic checking for choosing comparatively more stable VAR or VEC models.
The empirical evidence demonstrates that there exists a statistically significant long-run positive relationship between inflation and broad money supply for the country as indicated by a statistically significant long-run positive relationship between CPI and broad money supply.
The empirical evidence also demonstrates that the shock in LRGDP and LNER has no significant impact on LCPI. This also suggests that Real GDP and nominal exchange rate has no forecasting power of inflation in Bangladesh. The response of prices to their own shocks is again positive and has significant effect at all time periods and persistent, indicating the inflation inertia.
According to the model-1, the point estimates for inflation in Bangladesh is expected to be
This study examines the medium term forecasting of inflation rate in Bangladesh. Four important macroeconomic variables which have inter relationship among themselves are considered in the study and three different VEC models are estimated starting from a two-variable model including money supply and CPI, and sub-sequentially adding some financial variables such as real GDP and nominal exchange rates.
This paper empirically explores the present relationship between inflation and macroeconomic variables in the context of Bangladesh. Using annual data set on real GDP, money supply, nominal exchange rate and CPI for the period of fiscal year 1981 to 2010, an assessment of empirical evidence has been acquired through the co-integration, error correction models and forecasting. The analysis also uses variance decompositions (VDCs) and impulse response functions (IRFs) techniques. ADF test (unit root test), PP tests and KPSS tests are carried out to test the stationary and Jonansen test is used to test the cointegration. Normality test (Jarque-Bera test), serial correlation test (Portmanteau test) and ARCH (multivariate) test are used to diagnostic checking for choosing comparatively more stable VAR or VEC models.
The empirical evidence demonstrates that there exists a statistically significant long-run positive relationship between inflation and broad money supply for the country as indicated by a statistically significant long-run positive relationship between CPI and broad money supply.
The empirical evidence also demonstrates that the shock in LRGDP and LNER has no significant impact on LCPI. This also suggests that Real GDP and nominal exchange rate has no forecasting power of inflation in Bangladesh. The response of prices to their own shocks is again positive and has significant effect at all time periods and persistent, indicating the inflation inertia.
According to the model-1, the point estimates for inflation in Bangladesh is expected to be