Measuring Inflationary Pressure in Bangladesh: The P-Star Approach

The paper estimates the P* model for Bangladesh economy and test its forecasting ability through generating recursive forecasts. The empirical result shows that the model performs relatively well and contains additional information regarding future rates of inflation. The price and output gap models fare consistently better then the velocity gap model which brings out the importance of non-monetary factors in explaining inflation dynamics in Bangladesh. The P* model can have wide applications in policy analysis. With financial sector liberalization and reforms, it is likely that the scope for the P* model to play a more proactive role would be ramified in Bangladesh. [BB WP no.0901]