When and why does Bangladesh’s inflation differ from India’s?

Abstract

India and Bangladesh share a common historical background, geographical proximity, institutional similarities and a policy shift towards economic liberalization since the early 1990s. Inflation between these countries, however, often remains remarkably different, and the series of inflation differential between them does not follow any consistent pattern over time, suggesting an intriguing area of investigation. Working over the 1979–2010 period, this study finds support in favour of the Friedman hypothesis of the primacy of money supply in determining inflation in a country after accounting for supply shocks. In an autoregressive distributed lag model, this work shows that Bangladesh experienced higher inflation than India whenever Bangladesh’s money supply grew faster than India’s. The same is true for India as well, suggesting that both central banks must maintain their restrained stance in money supply if they need to lower inflation.

Keywords:

• inflation differential
• money-growth differential
• monetary phenomenon
• ADL model
• Bangladesh economy
• Indian economy

JEL classification:

• E31
• P44
• E52
• E63
• N15
• O23
• O57

Additional information

Notes on contributors

Biru Paksha Paul

Dr. Biru Paksha Paul joined the Economics Department of the State University of New York at Cortland in 2007. He is now an Associate Professor. His research interests include open economy macroeconomics, monetary economics, growth, business cycles and South Asia.

Hassan Zaman

Dr. Hassan Zaman joined the Central Bank of Bangladesh, Bangladesh Bank, in 2011. He is now the Chief Economist of Bangladesh Bank. Before joining Bangladesh Bank, he worked at the World Bank for 13 years in various capacities. His research interests include monetary policy, food prices, development issues and South Asia.