Globalisation, foreign demand, real exchange rate and Bangladesh exports: some empirical tests

Abstract

Using unit root testing, cointegration and vector error correction modelling, and utilising the longest available annual time-series data for Bangladesh, this study estimated the long-run equilibrium relationship between real exports with foreign demand, real effective exchange rate and trade globalisation. The cointegration tests and the associated short-run dynamic analysis confirm the existence of a long-run relationship. The system is found stable with a short-run speed of adjustment at the rate of about 18% per year. The dominant positive effects on exports came from foreign demand and the country's global integration. However, the real effective exchange rate variable displayed results that were not consistent with the traditional hypothesis. The results indicate that the policy makers need to focus more on global integration to open new geographic and product markets to diversify its export base instead of trying to keep the real effective exchange rate stable.