Measuring inflationary pressure in Bangladesh: the P-star approach

Working paper


Mujeri, Mustafa K., Shahiduzzaman, Md. and Islam, Md. Ezazul. 2009. Measuring inflationary pressure in Bangladesh: the P-star approach. Dhaka, Bangladesh. Bangladesh Bank.
Title

Measuring inflationary pressure in Bangladesh: the P-star approach

Report TypeWorking paper
AuthorsMujeri, Mustafa K. (Author), Shahiduzzaman, Md. (Author) and Islam, Md. Ezazul (Author)
Institution of OriginBangladesh Bank
Number of Pages21
SeriesWorking Papers
Year2009
PublisherBangladesh Bank
Place of PublicationDhaka, Bangladesh
Web Address (URL)http://www.bb.org.bd/pub/research/workingpaper/workingpaperlist.php
Abstract

The paper estimates the P* model for the Bangladesh economy and tests its forecasting ability through generating recursive forecasts. The model puts together long run determinants of price level based on the classical quantity theory of money and short term changes in current inflation. The empirical results show that the model performs relatively well and contains additional information regarding future rates of inflation. The price and output gap models fare consistently better than the velocity gap model which brings out the importance of non‐monetary factors in explaining inflation dynamics in Bangladesh. The out of sample forecasts show that the price gap model performs better followed by the output gap model and the velocity gap model. 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.

KeywordsP* model; inflation; Bangladesh; inflation; Bangladesh; P* approach; forecasts; velocity gap model; price gap model; output gap model; financial sector; monetary targeting policy
ANZSRC Field of Research 2020380119. Welfare economics
380399. Economic theory not elsewhere classified
380203. Economic models and forecasting
Public Notes

Copyright © 2009 by Bangladesh Bank.

Byline AffiliationsBangladesh Bank, Bangladesh
Journal TitleThe Bangladesh Development Studies
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