Is Budget Deficit Inflationary? A Case Study of Bangladesh

Abstract

Economists have been engaged in a long-standing macroeconomic debate regarding the actual cause of inflation. This debate arises mainly because of the disparities in internal situations and the different conventional views of developing and developed countries. In the case of Bangladesh, a consistent fiscal imbalance has been observed over the past two decades, and inflation has surpassed the threshold point. In this context, it is argued that one of the significant consequences of a budget deficit is its potential impact on inflation. This study attempts to analyze the effect of the budget deficit on inflation in Bangladesh for the period 2008-2023 using the ARDL cointegration approach based on quarterly time series data. The estimated results of this study reveal that budget deficits have a significant and positive long-run impact on inflation in Bangladesh. Additionally, the exchange rate regime and economic growth are other factors that significantly contribute to inflation. Thus, to maintain a stable inflation rate and promote sustainable economic growth in Bangladesh, effectively managing the budget deficit is crucial.