Impact of Budget Deficit on Inflation: Bangladesh Perspective

This study combines theoretical understanding with empirical analysis to investigate the relationship between inflation and budget deficits. Applying the Autoregressive Distributed Lag (ARDL) model on annual data spanning 1990- 2023, the findings reveal a significant long-run association between fiscal deficits and inflation, indicating that sustained government budget deficits contribute to rising price levels over time. In contrast, the short-run impact of fiscal deficits on inflation is relatively weak. The analysis also reveals that real GDP growth is associated with lower inflation in the long run, whereas higher government consumption tends to exacerbate inflationary pressures. The error correction term is negative and statistically significant, suggesting a stable model. These findings underscore the importance of sound fiscal discipline and coordinated monetary-fiscal policy to maintain price stability and support long-term macroeconomic sustainability.