An aggregate import demand function for Bangladesh: a cointegration approach

Abstract

This paper investigates the existence of a long-run aggregate merchandise import demand function for Bangladesh during the period 1974 - 94. The cointegration and error correction modelling approaches have been applied. Empirical results suggest that there exists a unique long-run or equilibrium relationship among real quantitities of imports, real import prices, real GDP and real foreign exchange reserves. The dynamic behaviour of import demand has been investigated by estimating two types of error correction models, in which the error correction terms have been found significant. In model I, real import prices and real GDP (lagged one year) and in model II, real import prices, real GDP (lagged one year), real imports (lagged one quarter) and a dummy variable capturing the effects of import liberalization policies have all emerged as important determinants of import demand function. The error correction models have also been found to be robust as they satisfy almost all relevant diagnostic tests.