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

Abstract

Sustainable high economic growth is the major objective of a country. Whereas inflation is one of the critical factors that affect economic development. 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 employing a non-linear autoregressive distributed lagged (NARDL) approach. For this study, we use annual time series data set on the growth rate of per capita gross domestic product, and the inflation rate for the time range from 1986 to 2017. The asymmetric cointegration result based on the NARDL approach shows the confirmation of long-run integration between the GDP growth rate and inflation rate (CPI). The study finds a positive and robust nexus between growth rate and inflation rate. The relationship exists both in the long-run as well as in the short-run. The results also have statistically significant. This study further explores that there is 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 that of a downward change. Furthermore, in the short-run, the positive change in inflations has a significant and positive influence on the growth rate. Still, the influence 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. This study recommends that to boosting up the economic growth in the context of Bangladesh, the inflation rate can be treated as a significant determination.