Macroeconomic Drivers of Inflation in Bangladesh: An Empirical Exploration

This study examines the macroeconomic drivers of inflation in Bangladesh using the Autoregressive Distributed Lag (ARDL) model to analyze data from 1990 to 2022, sourced from the Bangladesh government and World Bank. The primary objective is to identify key determinants of inflation and their short-run and long-run relationships with macroeconomic variables, including consumption-to-expenditure ratio (CEG), foreign direct investment (FDI), fiscal deficit (DFG), foreign reserves (RES), money supply (MNS), and gross domestic product (GDP). Interest rates are considered as a critical mediator in inflation dynamics for their monetary policy role. Employing rigorous econometric methods, the study finds that money supply and fiscal deficits significantly drive inflation in both the short and long run, with government policy playing a pivotal moderating role. Consumption expenditure and foreign reserves also exert notable influences. In contrast, FDI contributes to inflationary pressures in the short run but shows neutral effects in the long run, while GDP remains statistically insignificant across both horizons. Effective reserve management and fiscal discipline are critical for long-run inflation control. The findings underscore the necessity of coordinated monetary and fiscal policies to stabilize inflation in Bangladesh amidst global and domestic challenges, offering actionable insights for policymakers to balance price stability with sustainable growth.