Assignment on Inflation in Bangladesh Economy

This paper argues that inflation-targeting central banks should announce explicit loss function with numerical relative weights on output-gap stabilization and use and announce optimal time-varying instrument-rate paths and corresponding inflation and output-gap forecasts. Simple voting procedures for forming the Monetary Policy Committee’s aggregate loss function and time-varying instrument-rate paths are suggested. Announcing an explicit loss function improves the transparency of inflation targeting and eliminates some misunderstandings of the meaning of “flexible” inflation targeting. Using time-varying instrument-rate paths avoids a number of inconsistencies and other problems inherently associated with constant-interest-rate forecasts. In this analyses mainly we describe general national inflation rate, food inflation rate, nonfood inflation rate some reason, problems and solution of inflation rate.

Bangladesh has been experiencing a rapid growth in the general price level in recent years. The rate of inflation has crept up steadily since July 2009, rising from an average of 2.3 per cent during 2008/09 to a peak of 12 per cent in September 2011. The inflation rate declined to 9.9 per cent in April 2012. The rapid rate of inflation has become a major economic and social problem. Unless this is tackled forcefully and with some urgency it could become a substantial political debacle for the Government when it seeks re-election in the next 18 months. It is also important that right policy choices are made in the effort to control inflation based on sound analysis.

The Policy Debate: There is much policy debate, often influenced by populist perceptions, about what factors cause inflation. One popular debate concerns the role of nominal exchange rate in managing inflation. There are quite a few policy makers, researchers and businesses who believe that the depreciation of the exchange rate is the primary culprit underlying rapid inflation in Bangladesh. This group believes that the government should basically pursue a fixed nominal exchange rate policy. The underlying logic is the standard cost-push argument for inflation. Exchange rate raises the taka price of imported inputs that pushes up the cost of production and that in turn fuels inflation.

The other debate is the role of international commodity prices. The rising global food and fuel prices are seen as the main culprit underlying inflation in Bangladesh. In this debate inflation is temporary and the government has little control over inflation except to make efforts to insulate domestic food and fuel prices from rising through price controls and subsidies. The influence of this populist argument on policy making is large and illustrated by the rapidly growing subsidy bill of the government that has now run into almost 4.0 per cent of gross domestic product (GDP), equivalent to over 35 per cent of total tax revenue.

A third major policy debate is the perceived trade-off between growth and inflation. The argument here is that developing countries like Bangladesh have no choice but to tolerate significant inflation as a price for economic growth and development. This is a more substantive argument based on quantitative research done by the Bangladesh Bank that argues that there is a trade-off between inflation and growth well up to 6.0-8.0 per cent rate of inflation. Efforts to reduce inflation below this threshold level will have an adverse effect on growth.