Revisiting inflation and growth nexus in Bangladesh: an asymmetric cointegration based on non-linear ARDL approach

Abstract

Sustainable high economic growth is the major objective of a country. In contrast, inflation is a critical issue that alters economic development. For this, the growth-inflation nexus is one of the most controversial topics in this present world. This study re-investigates the link between inflation and the economic development of Bangladesh by applying a nonlinear autoregressive distributed lagged (NARDL) method. We utilize yearly time series data set on the growth rate of per capita GDP and the inflation rate for the time range from 1986 to 2017. Based on the NARDL approach, the asymmetric cointegration result confirms, between the GDP growth and inflation rates (CPI), a long-run integration exists. Between growth rate and inflation rate, the study finds a positive and robust nexus both in the long-run and in the short-run with statistically significant results. This study further explores an asymmetric relationship between the rate of inflation and the rate of economic growth. The nonlinear ARDL approach shows that the GDP growth rate responds more with an upward change in inflation than a downward change. Furthermore, the positive change in inflations has a significant and positive influence on the growth rate in the short run. Still, the effect of an adverse change in inflations has statistically insignificant. Both the policymakers of Bangladesh (Bangladesh Bank) and development partners working in the country can be benefited from these results in the context of policy implementation. To boost the economic growth in the context of Bangladesh, this study recommends that a moderate inflation rate can be treated as a significant determination