Are Exports and Imports of Bangladesh Cointegrated?
17 Pages Posted: 10 Dec 2008 Last revised: 14 Dec 2008
Date Written: December 9, 2008
The key objective of this article is to critically examine whether a "long-run relationship" between "Exports" and "Imports" exists or not and side by side, to investigate and find out the phenomena of a possible violation of inter-temporal budget constraint in an economy provoked by these two. For this examination, the observations of Bangladesh from the year 1976 up to the year 2006 of Export Earnings and Import Expenditure have been taken and used. For the measure of the real values of exports and imports, the restricted cointegration results demonstrate that there exists no long-run relationship between Bangladesh's exports and imports. Thus it seems that the economy does violate its inter-temporal budget constraint. Although the residual value is found to be stationary in its level form, Engle- Granger Test and Johanson VAR modeling show that export and import are not cointegrated. Possible reasons have been posited to explain this seemingly erroneous finding. Inclusion of remittance, grant and Foreign Capital investment to the trade balance equation might provide a cointegrating relationship in future researches. A reduced version of the proposed augmented model, using only grant and remittance inflow, failed to show any such relationship. However it was found that by changing the econometric model (suppressing the constant term) a one to one relationship between Export and Import could be established, although still no cointegration relationship was found. The augmented model performed better under the new econometric model.
Keywords: Exports, Imports, Cointegration, Error Correction, and Stationarity, Bangladesh
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By M. Upender