Government Domestic Borrowing and Inflation in Bangladesh and the Central Bank’s Monetary Policy to Curb Inflation

Abstract

This article examines whether there is any relationship between inflation
and government domestic borrowing. At present, in the year 2012 we are observing
that our country is suffering from double-digit inflation, which is an indirect result of
government borrowing. High debt through high borrowings increases inflation and
interest rates and reduces private investments creating crowding out effect. To
control the money supply, central bank has to take contractionary monetary policy
and it causes severe liquidity crisis in the banking sector. In this context, the present
paper attempts to provide a conceptual framework for understanding inflation and
its vicious cycle and the relationship between inflation and government borrowing.
Further, the study highlights whether the monetary policy taken by the country’s
central bank is able to prevent runaway inflation effectively.