Does Foreign Trade Affect Inflation in Bangladesh? An Econometric Exercise

Abstract

Nowadays, inaction is a burning issue in Bangladesh. The purpose of this article is to analyze whether exports and imports affect inflation and whether current inflation is influenced by the previous year’s exports and imports. Utilizing annual time series data from 1986 to 2020, the study applies the augmented Dickey-Fuller (ADF-) test, the Phillips-Perron (PP) test, Johansen’s cointegration test, the ordinary least squares (OLS) method, the fully modified OLS (FMOLS) method, and the lagged regression technique. The econometric results of the study show that exports have a positive, significant impact on inflation. Imports, on the contrary, have a positive but insignificant impact on inflation. Furthermore, the results of the lagged regression show that the previous period’s exports have a negative impact on the current period’s inflation, while the previous period’s imports have a positive impact, though both effects are insignificant. Research indicates that providing incentives and subsidies to major export industries, trade surplus, devaluation of the domestic currency, import prices, distortion of the trade balance, and improvement in terms of trade are the foreign trade-related factors that cause inflation in Bangladesh. The study suggests that the government of Bangladesh should create a competitive trade environment to reduce export-related inaction and lower its tariff rates and non-tariff trade restrictions to encourage other nations to export goods and services to us.