Ahmed, Muzib and Roy, International Journal of Applied Economics, September 2013, 10(2), 77-103 77 Price-Wage Spiral in Bangladesh: Evidence from ARDL Bound Testing Approach Monir Uddin Ahmed * , Moniruzzaman Muzib ** and Amit Roy *** * Shahjalal University of Science and Technology, ** Mawlana Bhashani Science and Technology University, and *** Shahjalal University of Science and Technology Abstract: This paper explores the interrelationship between price and nominal wage during the period of Fiscal Year 1975-76 to Fiscal Year 2009-10. An ARDL bound testing approach suggested by Pesaran et al. (2001) is employed to investigate the short-run dynamics and long- run relationship between consumer price index (CPI) and nominal wage rate, while accounting for the underlying macro determinants of price inflation, namely, the bilateral (TK/US dollar) nominal exchange rate, domestic credit and real gross domestic product (GDP). Our study shows that nominal wage rate and domestic credit exhibit a positive relation with the price level both in the short-run and in the long run. Moreover our result is robust as FMOLS, DOLS and Johansen- Juselius procedure ensuring that there is a long-run relationship between price and other macroeconomic variables under study. Again, the augmented Granger causality test ensures that wage and domestic credit have the impact on the inflationary process in both short-run and long- run. These results endorse the fiscal view of inflation which is more important for the stability of price level in Bangladesh. Keywords: wage, price, bound testing, cointegration JEL Classification: C 32, E31, E370, E5, E64 1. Introduction Price dynamics and its movement is one of the most discussant issues in macroeconomics. The interdependencies between price and wage and their affect on aggregate demand are often analyzed by economists and policymakers. Continuous rise in price level or inflationary process and its determinants have long been debated in literatures. Research on recent inflationary process in developing countries often leads the economists to distinguish the views into the 'fiscal view' and the 'balance of payment view'. Advocates of fiscal view claim that inflation and excessive monetary growth is closely related while they opined that the leading reason for this excessive money growth is the financing of budget deficit while the developing countries very often experienced with the deficit in their budget as in most cases government expenditure always surpasses the total revenues. 1 This reason accelerates not only the inflationary process, but also the adverse effect of this inflation often tend to increase the relationship between money growth, budget deficit and inflation. On the other hand, the proponents of balance of payments view emphasize on the induced impact of the exchange rate movements on the inflationary process. This type of movements like depreciation of exchange rate are often become the result of development of balance of payment problem which in turn give excessive government