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Understanding Price Elasticity: Debunking Myths in Bangladesh's Economic Policy

By Asif Khan, CFA

Chairman

EDGE AMC Limited

Posted on: 09 May, 2024

Among all the things I have to crusade about with regards to economic policymaking in Bangladesh, the strangest is price elasticity.

The majority of people seem to believe Aggregate Demand does not decline due to currency depreciation or interest rate hikes. They think that hiking interest rates is inflationary and that imports don't drop due to currency depreciation. This is actually Econ 101 and we studied these things in school curriculum.

Hiking interest rates reduce propensity to consume and increase propensity to save. That leads to lower imports. It also makes investing in local currency attractive relative to foreign. Right now the way rate hikes will lead to lower inflation is via currency stability.

Letting currency depreciate also reduces imports as it makes them expensive. Every single person I know has been cutting down on foreign travel or moving away from foreign brands to cheaper alternatives. The numbers are visible in the sales of consumer electronics and FMCG.

Orthodox economic policies work and they work everywhere in the world. Bangladesh is not an exception. Otherwise every single country of the world would have followed Erdoganomics.

Yes, there is a time lag from the time policies change to the time it impacts. Its also true that rate hikes and depreciation have harmful effects on the economy including slower economy etc. But claiming everything is inelastic is absurd.