Deficit Financing and Inflation in Bangladesh: A Vector Autoregressive Analysis

This paper analyses the dynamics of inflation in Bangladesh using vector autoregressive methods over the period from July 1999 to August 2008. Demand side factors are assessed in comparison with cost-push influences with a particular focus on the role of government borrowing from the domestic banking system. Over the sample period, previous values of inflation are the most significant source of inflation in the short-term, followed by net credit to the government. The results suggest that the management of expectations and the mode of budget financing are the most important focus areas for future price stability efforts.