Export response to trade liberalization in Bangladesh: a cointegration analysis

Abstract

This paper investigates the response of Bangladesh's aggregate merchandise exports to a real exchange rate-based trade liberalization programme during the period 1974-1995. The cointegration and error correction modelling approaches have been applied. The empirical results suggest that there exists a unique long-run or equilibrium relationship among real quantities of export, relative export price and export-weighted real effective exchange rate. The short-term dynamic behaviour of Bangladesh's export supply has been investigated by estimating an error correction model in which the error correction term has been found to be correctly signed and statistically significant. Relative export price (lagged two quarters), real effective exchange rate, predicted values of real GDP (lagged one quarter) and a dummy variable capturing the effects of trade liberalization programme have all emerged as important determinants of an aggregate export supply function for Bangladesh. The error correction model has also been found to be robust as it satisfies all relevant diagnostic tests.