Inflation and Economic Growth in Bangladesh: A Study on the Trend

Abstract

The link between inflation and economic growth has drawn attention of policy makers, macro-economists and central bankers of many developed, developing and least developed countries of the world. A debate continues on the issue whether inflation helps or hinders economic growth or not. Tobin and Mundall predict a positive link between the rate of inflation and the rate of capital accumulation. They argue, since money and capital are substitutable, an increase in the rate of inflation increases capital accumulation by shifting portfolio from money to capital and thereby stimulating a higher rate of economic growth. Again, Fischer and Modgliani suggest a negative and nonlinear relationship between the rate of inflation and economic growth through the new growth theory mechanisms. To them, inflation restricts economic growth by reducing efficiency of investment rather than its level. This paper discusses the link between inflation and economic growth in Bangladesh. The author has studied average inflation rate and average growth rate of 1996-97 to 2003-04 and 2004-05 to 2011-12 in Bangladesh. Data analysis of first eight years suggests that a low degree of positive relations exists between inflation and economic growth. Average inflation growth rate is found 4.68 percent and average growth rate is 5.30 percent. From the data analysis of second eight years (2004-05 to 2011-12) it is found that a low degree of positive co-relation exists between two. . Rate of inflation and economic growth. Average inflation rate is found 8.05 and average growth rate is 6.28. However, Bangladesh should be cautious about higher increment of inflation rate and it should not exceed ten percent. The author opines that low rate inflation trigger economic growth but once the economy achieves faster growth, inflation may affect sustainable growth.