Aggregated imports and expenditure components in Bangladesh: A cointegration and equilibrium correction analysis

Abstract

Even though there have been a few studies on Bangladesh's aggregate import demand, the effects of the global financial crisis (GFC) on aggregate import demand still need to be measured. The short-run determinants of import demand also remained to be identified in the country. This paper explores both short-run dynamic and long-run cointegrating relationships, capturing the impact of the GFC on aggregate import demand. This study uses annual data from 1980 to 2021 (N = 42) and employs different econometric techniques for efficient results essential for compelling policy implications. The study derives an efficient dynamic equation using the best error correction mechanism. Additionally, this study includes unconventional determinants, namely, foreign currency reserves and components of expenditure (i.e., exports, private consumption and government expenditures, and expenditures on investment goods), along with the traditional import demand function. The study finds that all conventional and unconventional determinants of import demand are significant in both the long and short run. All determinants except relative price positively influence the volume of import demand. The income elasticity reduces over time, and the price inelasticity remains non-zero and negative, which indicates the competitiveness of domestic product substitutes for importable goods in the economy. In the long run, trade liberalization and foreign currency reserves have a limited positive influence on import demand. The findings of this study would be helpful for import-related policy implications in the country.