Application of the P?Star Model for Measuring Inflationary Pressure in Bangladesh

Mustafa Kamal Mujeri, Md Shahiduzzaman and Md Ezazul Islam
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Mustafa Kamal Mujeri: Former Director General, Bangladesh Institute of Development Studies
Md Shahiduzzaman: Research Economist and Joint Director, Policy Analysis Unit, Bangladesh Bank
Md Ezazul Islam: Research Economist and Joint Director, Policy Analysis Unit, Bangladesh Bank

Bangladesh Development Studies, 2009, vol. 32, issue 1, 1-22

Abstract: The paper estimates the P* model for the Bangladesh economy and tests its forecasting ability through generating recursive forecasts. The model puts together long run determinants of price level based on the classical quantity theory of money and short term changes in current inflation. The empirical results show that the model performs relatively well and contains additional information regarding future rates of inflation. The price and output gap models fare consistently better than th e velocity gap model which brings out the importance of non-monetary factors in explaining inflation in Bangladesh. The out of sample forecasts show that the price gap model performs better followed by the output gap model and the velocity gap model. With financial sector liberalisation and reforms, it is likely that the relevance of P* types of model in explaining inflationary dynamics in the Bangladesh economy would be ramified.

Keywords: Application; P Star Model; Measuring; Inflationary; Pressure; in; Bangladesh (search for similar items in EconPapers)
JEL-codes: A10 (search for similar items in EconPapers)
Date: 2009
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