Determinants of Aggregate Import Demand of Bangladesh: Cointegration and Error Correction Modelling

The study focuses on the empirical modelling of the major determinants of imports demand of Bangladesh using annual data. We, not only, critically examine the determinants of imports demand following conventional wisdom but have taken into account some plausible new determinants like foreign exchange reserves and final expenditure components also. The paper investigates the impact of trade liberalizations as well. We finally employ the equilibrium correction mechanism (ECM) to investigate the short-run dynamics of imports demand. The estimated results demonstrate that the real GDP and relative prices of imports are statistically significant and show expected signs for Bangladesh. Relative imports prices is an important determinant of imports demand both in the short- and long-run. We find that the hypothesis of unit coefficient of income in the aggregate imports demand is apposite in Bangladeshi data. Trade liberalization could not make any special difference for the imports demand of the country. Finally, we argue on the basis of estimated results that the demand for Bangladeshi exports determines its aggregate imports demand. This paper was presented in the 18th International Conference, International Trade and Finance Association, Lisbon, Portugal, May 21-24, 2008.