Academic journal article Researchers World

Inflation in South Asia and It's Macro Economic Linkages

Academic journal article Researchers World

Inflation in South Asia and It's Macro Economic Linkages

Article excerpt

ABSTRACT

The objective of this paper is to analyze the consumer price inflation in South Asian Countries from 2000 to 2008. The annual percentage change in CPI and Average Annual Growth Rate in Consumer Price Indices are analyzed to examine the trend of inflation in South Asian Countries like Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan & Sri Lanka. India has average inflation of 5% but Sri Lanka is the hardest hit by the inflation among South Asian countries. Bhutan has very low rate of inflation and Maldives has rising trend of inflation. The inflation rates are co-related with the growth rate of gross domestic product and money supply of South Asian Countries. There is positive co-relation between the rate of inflation and rate of changed in GDP at constant prices in Bangladesh, India, Pakistan, and Sri Lanka but negative corelation in Nepal. There is negative co-relation between rate of inflation and changes in money supply in Bangladesh, Nepal and Pakistan but positive co-relation in Nepal and Sri Lanka. In Pakistan the consumer price inflation is mainly due to oil price hike and food inflation. So the inflation scenario in South Asia is adverse to economic development as it is above 5% in most of the countries.

Keywords: Inflation, Correlation, Money Supply, Macro Economics, Variable.

INTRODUCTION:

Inflation is a global phenomenon and significant macro economic variable which affect the economic growth of all most all countries of the world. While some amount of inflation is inevitable and is perhaps necessary to accompany development, inflation beyond a certain limit is considered undesirable. A mild rate of inflation within 4 percent per year is good for an economy, but many developing countries of the world are experiencing inflation above the mild rate which is harmful for the economy. Control of inflation has, therefore, become one of the primary objectives of Government intervention in many developing countries(Islam,2008). The inflation has been over stressed as a prime element in the policies prescribed by the international financial organizations and donor countries in the frame work of conditionality of lending. The inflation is measured from the changes in consumer price index (CPI ) in all countries. The objective of this research paper is to analyze the inflation scenario in South Asian Countries (Afghanistan, Bhutan, Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka) with it's macro economic linkages.

LITERATURE REVIEW:

Empirical studies in pre-growth period( before 1990) generally found a negative inflation-growth relationship. A pre-growth literature study in 1985 had already reported a finding that GDP growth was negatively related to the growth rate of inflation. Fischer (1993) reported that growth was related inversely to inflation. New growth models of course focused on the long run. The collective wisdom of the literature could be made consistent by saying that inflation was positively related to growth at short-run, cyclical frequencies, but negatively related to growth at long-run, steady-state frequencies. There was only one problem with this reconciliation of the short run and long run that there was no robust long-run, cross- section relationship between inflation and growth. The statistically significant negative relationships in the new growth period. Several studies have estimated a negative relationship between inflation and economic growth. Nevertheless, some studies have accounted for the opposite. Thirlwall and Barton (1971), in one of the earliest cross-country studies, report a positive relationship between inflation and growth in a cross section of industrial countries and a negative relationship in a cross section of 7 developing countries.

Gillman et al. (2002), based on a panel data of Organization for Economic Cooperation and Development (OECD) and Asia-Pacific Economic Cooperation (APEC) countries, indicate that the reduction of high and medium inflation (double digits) to moderate single digit figures has a significant positive effect on growth for the OECD countries, and to a lesser extent for the APEC countries. …

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