An Empirical Analysis of Fiscal Deficit and Inflation in Bangladesh

This paper empirically examines the impact of fiscal deficit on inflation in the context of Bangladesh. The question addressed is – are the methods of financing the fiscal deficit of Bangladesh inflationary? There are several options available to the hand of government to finance its budget deficit including bank borrowing, non-bank borrowing, and printing money. The government of Bangladesh uses all the three sources. The government's borrowing from the central bank is of special interest in this research paper. It is found by analyzing data from 1973 to 2018 that there exists a long-run relationship among inflation, fiscal deficit (FD), and total bank borrowing (TBB) as there exist more than 1 cointegrating equation. In the Johansen Cointegration Test, it is found that FD is negatively and TBB is positively related to inflation. However, FD is not significant at a 5% level of significance whereas TBB is significant at that level. It is found through the vector error correction model that changes in FD and TBB are absorbed by inflation every 8 months