JBS Vol 15. Num 2. 2013 - Money Growth, Relative Food Prices and Inflation in Bangladesh: An Empirical Investigation with Monthly Data, 1972–2011

This paper uses trend-and-seasonally-adjusted monthly data over the period 1972–2011 to investigate the presence and quantum of any long-run relation between money supply (narrow or broad); consumer prices and food prices; the nominal exchange rate; and industrial output in Bangladesh. It tests the validity of the money-neutrality prediction that nominal prices, namely food prices and consumer prices, increase proportionately to an increase in the money supply. The empirical results are consistent with this prediction, implying that the relative prices of food are long-run-invariant to an increase in money supply. Short-run food prices, however, respond to monetary expansion more rapidly than the general price level as proxied by the consumer price index (CPI). To investigation the sources of inflation, this paper estimates an error-correction model of inflation within the Autoregressive Distributed Lag (ARDL) cointegration approach. The empirical results suggest that changes in the relative prices of food and currency devaluation impact positively on the rate of inflation. The results obtained by the ARDL modeling approach support those obtained by both the Granger (predictive) causality tests and impulse-response analytical techniques.