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Econimics Term Paper On Inflation

3165 words - 13 pages

“Analysis of inflection, CPI and Annual Growth Rate:
A South Asian Perspective”

Prepared for
Bishnu Prakash Adhakari
Economics: Course facilitator
SOMTU, Kritipur

Prepared by
Gokul Gaire
MBA 2nd Semester

July 18, 2013

The rate of inflation- the percentage change in the overall level of prices- varies grately across time and cross country. The objective of this paper is to analyze the consumer price inflation in South Asian Countries from 2002 to 2010. 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, ...view middle of the document...

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. 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 its macroeconomic linkages.

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. Fisher (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. They further add that the effect of an expected deceleration of inflation might only be observed when the world economy is not facing a sudden growth rate deceleration due to shocks. If there are no such shocks, a reduction in inflation rate can produce considerably higher growth rate. Similarly, Alexander (1997) finds a strong negative influence of inflation on growth rate of per capita GDP using a panel of OECD countries. Ghosh and Phillips (1998), using large panel dataset, covering IMF...

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